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Tax-exempt entity controlled group aggregation rules under 1.414(c)-5


Guest Pennysaver

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Guest Pennysaver

The Treasury Regulations issued in 2007 for Section 1.414©-5 provide special aggregation rules for purposes of determining controlled group status for organizations that are tax-exempt under IRC 501(a). Is there any guidance available with respect to non-profit organizations that are not tax-exempt under IRC 501(a)?

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Guest Quagmire
The Treasury Regulations issued in 2007 for Section 1.414©-5 provide special aggregation rules for purposes of determining controlled group status for organizations that are tax-exempt under IRC 501(a). Is there any guidance available with respect to non-profit organizations that are not tax-exempt under IRC 501(a)?

All the exclusions provided under 1.414©-3 are for tax-exempt organizations. I believe that not-for-profits that are not tax exempt are subject to the regular 414 controlled group rules.

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Pennysaver: Not sure if Quagmire was trying to convey the same message, but if the entity is not tax-exempt under 501(a), you ignore the ©-5 regulation and just work through the 414(b) and © normal rules (although you may then wish to consult an IRS GCM and private ruling issued in the 1980s that were the genesis of the ©-5 regulation). Don't take this the wrong way, only trying to be helpful, but are you sure that the entity is not tax-exempt under 501(a)? In other words, if it is not exempt under 501©(3) as a charity could it be exempt under some other provision of 501©? Does it actually file a Federal income tax return and pay tax?

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Guest Pennysaver
Pennysaver: Not sure if Quagmire was trying to convey the same message, but if the entity is not tax-exempt under 501(a), you ignore the ©-5 regulation and just work through the 414(b) and © normal rules (although you may then wish to consult an IRS GCM and private ruling issued in the 1980s that were the genesis of the ©-5 regulation). Don't take this the wrong way, only trying to be helpful, but are you sure that the entity is not tax-exempt under 501(a)? In other words, if it is not exempt under 501©(3) as a charity could it be exempt under some other provision of 501©? Does it actually file a Federal income tax return and pay tax?

Thanks, Quagmire and jpod. Jpod: I am not taking what you asked the wrong way, as it is a valid question. But yes, I am discussing organizations that are non-profits under individual state law, and are not in any way whatsoever tax-exempt under federal law (501(a), 501©, etc.) I understand that if you do not fall under 1.414©-5, then the "normal" rules apply. However, that leads to a null result, because the "normal" rules require ownership, and there are no owners of an organization that is non-profit under state law. Such organizations have members, but the control exerted by those members over the non-profit organization falls neither under the "normal" rules of 414(b) and © nor under the tax-exempt rules of 1.414©-5. I am familiar with the GCM and PLR from the 1980s that you referenced, but is there any more recent guidance available that would address the determination of whether a controlled group exists where entities are members of organizations that are non-profit organizations under state law?

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I am not aware of any other guidance, unless IRS said something in the preamble to the proposed or final 414©-5 reg that could be pertinent to taxable non-profits.

Prior to the ©-5 reg, my position was always that there was no way the IRS could attempt to apply controlled group/common control principles to non-ownership entities, taxable or tax-exempt, to lead to an adverse tax result (e.g., plan disqualification) because there was no regulation (let alone statute) authorizing that. On the other hand, while not "precedent," I felt that someone who wished to apply control group principles under the rationale of the GCM and PLR could do so, as long as it was done consistently, and it was unlikely the IRS would have the stomach to take a position contrary to the GCM and PLR. Unless IRS has revoked the GCM and PLR, which I don't recall happening, I think you're in the same position with your situation.

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