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

Manual Transmittal

November 19, 2014


(1) This transmits revised IRM 4.76.1, Exempt Organizations Examination Guidelines, IRC 501(c)(2) Single Parent Title-Holding Corporations .

Material Changes

(1) Converted this manual section to plain language. For guidance on the Plain Language Act, see Replaced each mention of examination (except for the title of the division) with audit, and examiner with agent.

(2) Rearranged the manual, shifting the previous examination guidelines to the Field/Office Correspondence Examination Program section and creating new sections for pre-audit planning and case closing.

(3) Inserted titles for IRM sections and forms appearing in this manual.

(4) Added an explanation of the term agent at IRM

(5) Added a list of abbreviations appearing in this manual at IRM

(6) Merged IRM and together, renumbering the rest of the manual as a result.

(7) Rearranged the list of permitted exceptions to the ban on UBI in IRM to be in numerical order.

(8) At IRM (previously IRM replaced the lengthy discussion about special situations involving multiple parents with references to GCM 37351 and GCM 39460.

(9) The following table outlines the change in numbering:

Old paragraph location New paragraph location (1) (1) (2) (2) (3) (3) (4) (4) (1) (2) (1) (1) (1) (1) (2) (2) (3) (3) (1) (1) (2) (2) (3) (3) (1) (4) (1) (1) (2) (2) (3) (3) (1) (5) (2) (6) (3) (7) (1) (1) (2) (2) (3) (3) (1) (8) (1) (1) (2) (2) (3) (3) (1) (9) (2) (10) (3) (11) (4) (12) (5) (13) (6) (14)

Effect on Other Documents

This supersedes IRM 4.76.1 dated April 15, 2003.


Tax Exempt and Government Entities
Exempt Organizations

Effective Date


Tamera L. Ripperda
Director of Exempt Organizations
Tax Exempt and Government Entities  (11-19-2014)

  1. This IRM contains specific audit guidelines and techniques for IRC 501(c)(2) tax-exempt title-holding corporations.

  2. These guidelines are not all-inclusive. This manual supplements the guidelines contained in:

    • IRM 4.75.10, Exempt Organizations Pre-Audit Procedures

    • IRM 4.75.11, On Site Examination Guidelines

    • IRM 4.75.12, Required Filing Checks

    • IRM 4.75.13, Issue Development

  3. This IRM does not restrict the agent in identifying issues or using audit techniques not presented herein.

  4. This IRM contains basic technical information. For detailed technical information, see IRM 7.25.2, Single Parent Title Holding Corporations.

  5. The term agent refers to the EO employee assigned to the case, regardless of whether the employee is in the GS-0512, GS-0526, GS-592, or GS-987 series.

  6. The following abbreviations appear throughout this manual:

    • ESS (Examination Special Support)

    • IDR (Information Document Request)

    • IDRS (Integrated Data Retrieval System)

    • RCCMS (Reporting Compliance Case Management System)

    • Regs (regulations)

    • SEIN (Statistics of Income Exempt Organization Return Image Net)

    • UBI (unrelated business income)

    • UBIT (unrelated business income tax)

    • UBTI (unrelated business taxable income)  (11-19-2014)
Organizational Requirements

  1. IRC 501(c)(2) describes a corporation as tax-exempt under IRC 501(a), if organized for the exclusive purposes of:

    • Holding title to property.

    • Collecting income therefrom.

    • Turning over the net income to an IRC 501(a) tax-exempt parent organization.

  2. IRC 501(c)(2) doesn't include a corporation that:

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


      Property can be either real or personal. Investment income is permitted.

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


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


    Treas. Reg. 1.501(c)(2) does not reflect Public Law 103–66, Omnibus Budget Reconciliation Act of 1993, Section 13146(b), that allows title-holding corporations to receive up to 10% of their income from activities incidental to holding real property. See IRC 501(c)(2) and IRC 501(c)(25)(G).  (11-19-2014)

  1. The statute does not specify the relationship required between an IRC 501(c)(2) corporation and its parent organization. Traditionally, the relationship is parent and subsidiary (the parent organization owns the corporation).

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

    1. Ownership of the voting stock of the 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 corporation precludes exemption as an IRC 501(c)(2) entity.  (11-19-2014)
Distribution of Income

  1. An IRC 501(c)(2) corporation must turn over the entire amount of its income, less expenses, to an IRC 501(a) tax-exempt organization.

  2. Neither the Code nor the regs define the timing of this distribution. As a practical matter, allow the title-holding corporation until the end of the succeeding taxable year to make the distribution.

  3. The type of distribution is unimportant. It could be termed a dividend or given some other description. The title-holding corporation could provide the parent organization rent free use of the facilities. The title-holding corporation must actually pay the distribution to the parent organization, not accrue it. Neither an obligation to use the income for the parent organization's benefit nor parental control of the title-holding corporation satisfies this requirement.  (11-19-2014)
Permissible Sources of Income

  1. IRC 501(c)(2) 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.

  3. The title-holding corporation may not hold a working interest, in which the holder of the interest is responsible for a portion of the operating costs of oil or mineral production.  (11-19-2014)
Unrelated Business Income

  1. In general, an IRC 501(c)(2) corporation may engage only in the business of holding title to property for, and turning the net income over to, the parent organization. A title-holding corporation can't have UBTI as defined in IRC 512.

  2. Treas. Reg. 1.501(c)(2)-1(a) sets out the following exceptions to this rule. A title-holding corporation may retain IRC 501(a) exemption if it has income treated as UBTI solely because of:

    1. IRC 512(a)(3)(C): Applies the UBTI definition applicable to IRC 501(c)(7), IRC 501(c)(9), and IRC 501(c)(17) organizations to IRC 501(c)(2) corporations.


      IRC 512(a)(3)(C) refers also to an organization described in IRC 501(c)(20). If the title-holding corporation has a parent organization which has an IRC 501(c)(20) determination letter, follow the instructions provided in IRM, Modification or Revocation of IRC 501(c)(20) Status.

    2. IRC 512(b)(3)(A)(ii): Excludes 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 received or accrued under the lease.

    3. IRC 512(b)(3)(B)(i): Renders the rental exclusion of IRC 512(b)(3)(A) inapplicable if more than 50 percent of the total rent received or accrued under the lease is attributable to personal property leased with the real property.

    4. IRC 512(b)(3)(B)(ii): Renders the IRC 512(b)(3)(A) rental exclusion inapplicable if the amount of rent depends in whole or in part on the income or profits any person derives from the leased property.

    5. IRC 512(b)(13): Deals with the extent to which any interest, annuities, royalties, and rents received from controlled entities must be treated as UBTI.

    6. IRC 514: Deals with the extent to which income from debt-financed property must be treated as UBTI.


    The title-holding corporation owes UBIT on UBTI generated under these exceptions.

  3. IRC 501(c)(2) applies the rules of IRC 501(c)(25)(G) to IRC 501(c)(2) corporations. IRC 501(c)(25)(G) permits such corporations to have UBTI up to 10 percent of their gross income from sources incidental to the holding of real property, for example, income from parking lots or vending machines, but not from manufacturing.  (11-19-2014)
Pre-Audit Guidelines

  1. Check IDRS (command code INOLES) for a cross reference Employer Identification Number (EIN). Use command codes INOLES, BMFOLE/ENMOD, and/or BMFOLO to view the exempt status (or lack) of any cross reference entity.

  2. Conduct the package audit on IDRS via command code BMFOLI. Check for:

    • Forms 990-T, Exempt Organization Business Income Tax Return

    • Forms 941, Employer's Quarterly Federal Tax Return

    • Forms 940, Employer's Annual Federal Unemployment (FUTA) Tax Return

  3. If you find unusual returns, such as the following, deem them unusual and include them in your audit:

    • Form 11-C, Occupational Tax and Registration Return for Wagering

    • Form 720, Quarterly Federal Excise Tax Return

    • Form 730, Monthly Tax Return for Wagers

    • Form 2290, Heavy Highway Vehicle Use Tax Return

  4. A title-holding corporation might not have a website, but any real property owned by the corporation might have a website. If you find a website, review the entire website for information on the title-holding corporation and any activities the corporation might be conducting.


    A corporation might own a shopping mall or an office tower. Such facilities normally have websites.

  5. Check the county recorder office's website for property records for the title-holding corporation and the parent organization. Review any documents for details on the size, location, ownership, and sales details. Check for any recorded loans. Record your findings for later usage in UBTI calculations.

  6. Review the Form 990, Return of Organization Exempt From Income Tax or Form 990-EZ, Short Form Return of Organization Exempt From Income Tax Perform a large, unusual, or questionable analysis on the form. Look for:

    • A description of any activity other than holding property.

    • Unusual sources of income, such as anything other than investment income or sales of assets.

    • Unusual expenses, such as benefits paid to members.

    • Assets other than cash, investments, land, or buildings.

    • Unusual position titles for key employees.

    • Questionable responses to the yes/no questions.

    • Unusual independent contractor services.

    • Missing schedules and statements.


    Forms 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or Form 990EZ provide little in information. During the field audit, verify all information reported.

  7. Check Online SEIN for prior and subsequent years Forms 990 or 990-EZ. Perform large, unusual, and questionable item analyses of those returns as well. (EO Select Check provides information from filed Forms 990-N.)

  8. Check Online SEIN for related Forms 990-T, if not present in RCCMS. Analyze the return. Determine the following:

    • What is the income source?

    • Does the title-holding corporation have more than one source of UBI?

    • Does the corporation conduct an active business?

    • If yes, does the corporation claim an exclusion? (IRM (2))

    • Are there unusual expenses?

    • Does a type of expense appear in more than one place?

    • Do the total expenses match the Form 990 total expense amount?

    • Are there net operating losses?

    • Does the corporation claim questionable expenses, such as distributions to the parent organization?

  9. When composing the initial interview, consider the following questions:

    • Does the title-holding corporation have a parent organization? If not, did it have one at one time?

    • Did it apply for IRC 501(c)(2) recognition? If not, what did it apply for?

    • Does the corporation have more than one parent organization? If yes, who are they? If not, what's the name and EIN of the parent?

    • What activities does the corporation conduct?

    • Does the corporation make a distribution to the parent organization? If not, why not? If yes, when and how frequently?

    • What relationship does the corporation have to the parent organization? If none, what is the connection?

    • How does the parent organization control the corporation?

    • Who in the parent organization gives directions to the corporation? Does that person also work for the corporation? Is that person on the board of the corporation?  (11-19-2014)
Field/Office Correspondence Audit Guidelines

  1. Research IDRS to check the exempt status of the parent corporation, using command codes BMFOLE/ENMOD, BMFOLO, and/or INOLES. (EO Select Check may give faster results.)


    If the parent organization isn't exempt, consider revocation for the title-holding corporation.

  2. Review the organizing documents to verify that the exclusive purpose is to hold title to property. Any language empowering the title-holding corporation to engage in any other business fails IRC 501(c)(2).


    If the organizing documents go beyond the "exclusive purpose" but the corporation's activities are okay, let the corporation promptly amend the organizing documents.

  3. Determine whether the title-holding corporation has more than one parent organization listed in the organizing documents. If the corporation has more than one parent organization, develop all of the facts, review the determination file, and research whether the corporation qualifies under IRC 501(c)(2).


    Generally, IRC 501(c)(2) corporations can't have more than one parent organization. Multiple parent organizations may be allowed in specific circumstances, such as when parent organizations are related or own property jointly. See GCM 37351 (December 20, 1977) and GCM 39460 (December 26, 1985).


    If the corporation does not qualify under IRC 501(c)(2) because it has multiple unrelated parent organizations, determine if it qualifies under IRC 501(c)(25), which explicitly permits multiple parent organizations.

  4. Determine from the organizing documents, agreements, contracts, correspondence, and interviews:

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

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

  5. Review documents, such as bylaws, minutes, and agreements for established procedures on the distribution of net income.

  6. Analyze disbursements to see if the title-holding corporation is distributing its income, less expenses, to the parent organization.


    The term "expenses" includes operating costs deductible by for-profit entities, as well as a reasonable depreciation allowance.

  7. Review financial records to determine whether the title-holding corporation (at least annually) timely distributes its income or improperly accumulates the income.


    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.

  8. Analyze financial records to determine whether investment income derives from passive investments or from an active business, such as securities trading.

  9. Review the title-holding corporation's activities to see if the corporation engages/engaged in nonexempt activities. Establish the activities by:

    • Interviewing officers, directors and employees.

    • Reviewing the minutes, correspondence files, agreements and contracts.

  10. Review sources of income to see if the title-holding corporation has unrelated debt financed income.

  11. Look for rentals of personal property. If the title-holding corporation has rental income from personal property leased with real property, determine whether it's UBTI. See IRC 512(b)(3)(A)(ii) and IRC 512(b)(3)(B)(i).

  12. If the title-holding corporation derives UBTI from permissible activities incidental to the holding of real property, determine if the income exceeds 10 percent of its gross income.

  13. If such incidentally-derived income exceeds the 10 percent limit, determine if the title-holding corporation established that its receipt of such excess income was inadvertent and that it took reasonable steps to correct the circumstances giving rise to the income. See IRC 501(c)(2), final sentence, and IRC 501(c)(25)(G).

  14. If the title-holding corporation received UBTI from permissible activities, inspect the Form 990-T to verify the proper reporting of the UBI and expenses.

  15. If the title-holding corporation received UBTI from non-permissible activities, consider revocation of its exempt status under IRC 501(c)(2) or modification to another code section, if it qualifies under that section.  (11-19-2014)
Case Closing Guidelines

  1. Cases involving IRC 501(c)(2) corporations may involve the following possible closures:

    • No change/no change with advisory

    • Agreed/unagreed code section modification

    • Agreed/unagreed revocation

    • Agreed/unagreed tax assessment

    • Delinquent related return secured

  2. For cases involving no change/no change with advisory, refer to IRM, No Issues, IRM, Issues Under Tolerance (Written Advisory) and IRM 4.75.16, Case Closing Procedures, for the applicable closing letter and case closing procedures.

  3. For code section modifications, see IRM, Modification of Exempt Status, for the audit report procedures. Cases close to Mandatory Review. (IRM, Cases Subject to Mandatory Review)

  4. For revocations, see IRM, Revocations, for the audit report procedures. Cases close to Mandatory Review. (IRM

  5. For proposed tax assessments, see the following sections for the appropriate audit report procedures:

    • IRM, Unrelated Business Income Tax (UBIT)

    • IRM, Employment Taxes

    • IRM, Non-Private Foundation Excise Taxes

    Agreed cases close to ESS. Unagreed cases close to Mandatory Review. (IRM

  6. For secured delinquent returns, see IRM, Delinquent Return Received. If not opened for audit, and the case does not involve code section modifications, revocations, or unagreed tax assessments, close the case to ESS. If opened for audit, close the case as either a no change (delinquent return secured), agreed tax change, or unagreed tax change.

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