Question 85: X corp is a not-for-profit entity. X corp is the sole member and controlling entity of Y hospital. X corp also created several for-profit entities. Each for-profit entity issued all of its stock to a trust. X corp is the sole beneficiary of each trust. Are X corp, Y hospital and each of the for-profit entities a controlled group under Internal Revenue Code section 414?
Answer: Let's start at the most basic level. We have a series of trusts, each of which has a single beneficiary, X, and each of which owns 100% of the stock of a corporation. X is deemed to own 100% of what each trust holds, because it is the sole beneficiary. Thus, after attribution, X is deemed to own 100% of the stock of each business. That's a classic parent-subsidiary controlled group. All of those businesses are treated as a single entity under Code section 414(b).
Now we come to Y. Y is a nonprofit organization, but its sole member, X, controls the Board of Directors. With regard to this situation, the IRS has said privately that control of the Board is tantamount to ownership of the stock, which the IRS would say causes Y to be under common control with X and its profit-making subsidiaries.
However, there is doubt on that issue. For one thing, there is absolutely nothing in Code section 414(c) or the regulations under Code section 414(c) that justifies this conclusion. The IRS has said, in essence, "Until we figure out what to do with these situations, any reasonable good faith interpretation of the Code will do." The IRS does not presently seem to be in any great hurry to write any regulations on the subject.
So, with regard to all the entities other than Y, it is clear that they are in a controlled group. (There is no way I can see how 414(b) could be construed otherwise.) As for Y, you have a choice. If you want it to be part of the group, then go along with the IRS' analysis, and you can be reasonably confident that nobody will challenge you. If you really want Y to be separate, then you could argue that it is not literally under common control, based on the language of Code section 414(c) as it stands now.
The common control rules, including those relating to common control under IRC 414(c), are discussed in more detail in Chapter 12 of my book, Who's the Employer?.
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