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|Question 299: This question relates to credit unions and the common control regulations for tax-exempt organizations (Sec. 1.414(c)-5). There are a number of credit unions that are "sponsored" by various types of employers (corporations, school districts, government agencies, etc.). The credit unions were essentially established to serve as financial institutions for the organizations' employees. And, in many cases, the credit union membership is limited to employees of those organizations. Every credit union has a board of directors. In situations where a credit union is sponsored by an employer organization, the board of directors is mainly comprised of employees of the organization. They are elected by the credit union membership, not appointed by the employer organization. But they are nonetheless employees of the organization. My question is: Are these credit unions under common control with the sponsoring employer under the new regulations?|
Answer: This excellent question is important for several reasons besides the concerns of credit unions:
Sentence 2 sets forth the standard that we use to determine if common control exists under the regulations. If at least 80% of the board members (be it board of directors or board of trustees or any other governing body) of one organization are “representatives of” or “controlled by” the other organization, the two are under common control. Again, sentence 2 carefully indicates that it applies to an exempt organization and “another organization”
Sentences 3 and 4 define “representative of” and “controlled by,” respectively. Suppose I am on the board of exempt organization 1. Sentence 3 tells us that if I am a board member, agent, or employee of another exempt organization, I am a representative of that second organization. Sentence 4 tells us that if another organization has the general power to remove and replace me (under all facts and circumstances — see sentence 5), I am controlled by the second organization.
Now, compare the types of entities described in sentences 3 and 4. Sentence 4, defining “controlled by” follows the pattern of sentences 1 and 2. It is not limited to a pair of exempt organizations. In fact, if sentence 4 stood on its own, it could apply to any two organizations, regardless of exempt status. Of course, in context, at least one of the two organizations must be an exempt organization for the paragraph as a whole to apply.
But now look at sentence 3. In this very carefully crafted paragraph, sentence 3, the definition of “representative of” is limited to two exempt organizations. By its terms, sentence 3 does not apply to the combination of an exempt organization and a taxable business.
(Sentence 6 provides an example showing a chain of related organizations. The only taxable organization is C, which is part of the chain under the normal parent-subsidiary rules, without regard to the new regulations.)
This new rule does not apply to churches or church-controlled organizations. Treas. Reg. §1.414(c)-5(a). According to the regulatory preamble, it also does not apply to “a State or local government or a federal government entity.”
I submit there are two ways to interpret the limitation of sentence 3.
A. The Treasury didn’t mean it when they limited sentence 3 to two exempt organizations, and read in context they really intended it to apply to any pairing of an exempt organization and another organization. If that’s true, the employer-sponsored credit unions may be in deep trouble if they try to establish separate plans. But there is nothing in the regulatory language or the preamble to suggest that is true.
B. Alternatively, the Treasury meant what they said. An exempt organization can be under common control with any other organization if one of the two organizations controls at least 80% of the directors of the organization. If (and only if) you are dealing with two exempt organizations, you expand the common control situations to include directors of one organization who are “representatives of” or “controlled by” the other organization. If you can’t tell, I favor interpretation B. I am reading the words on the page and assuming that the Treasury meant what it said.
This is only part of the discussion of the new common control rules from the 5th edition of Who’s the Employer. Although I have begun shipping the print edition of the book, I will continue to honor my
"pre-order" 10% discount on all orders received through January 7, 2009.
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.