Title-holding company denied exemption because its income went to a nonexempt parent

Plain-English summary

A corporation held commercial real estate, collected rent from unrelated tenants, and distributed the net income to its sole member. That member was disregarded to a foreign organization that the applicant described as charitable, but the foreign organization was not exempt under section 501(c)(3). Section 501(c)(2) exempts a title-holding corporation only when it turns over its income, less expenses, to an organization that is itself tax-exempt. The IRS therefore issued a final adverse determination and required the corporation to file Form 1120.

Ruling snapshot

• Question: Did the property-holding corporation qualify for exemption under section 501(c)(2) when its net income ultimately went to a nonexempt foreign organization?
• Outcome: denied
• Key authorities: IRC §§ 501(a), 501(c)(2), and 7428; Treas. Reg. § 1.501(c)(2)-1(b); Rev. Rul. 69-381

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Appeals Office

Date: OCT 10 2019

Person to contact:
Name:
Employee ID number:
Telephone:
Fax:
Hours:
Employer ID number:

Number: 202001027
Release Date: 1/3/2020
Uniform issue list (UIL):
501.02-00

Certified Mail

Dear

This is a final adverse determination that you do not qualify for exemption from federal income tax under
Internal Revenue Code (the "Code") Section 501(a) as an organization described in Section 501(c)(2)

of the Code.

We made the adverse determination for the following reasons:

You do not meet the requirements under Internal Revenue Code section 501(c)(2) because the organization for
which you hold title to property is not itself tax exempt under section 501 of the Internal Revenue Code.

You're required to file federal income tax returns on Forms 1120, U.S. Corporation Income Tax Return. Mail
your form to the appropriate Internal Revenue Service Center per the form's instructions. You can get forms and
instructions by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under
Section 6110 of the Code after deleting certain identifying information. We provided to you, in a separate
mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached
that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in Notice

437.

If you decide to contest this determination, you can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

• The United States Tax Court,
• The United States Court of Federal Claims, or
• The United States District Court for the District of Columbia

Letter 1371 (Rev. 12-2017)
Catalog Number 40683R


You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate forms for
filing petitions for declaratory judgment. You can write to the courts at the following addresses:

United States Tax Court US Court of Federal Claims US District Court for the District of Columbia
400 Second Street, NW 717 Madison Place, NW 333 Constitution Avenue, NW
Washington, DC 20217 Washington, DC 20005 Washington, DC 20001

Note: We will not delay processing income tax returns and assessing any taxes due even if you file a petition for
declaratory judgment under Section 7428 of the Code.

Please refer to the enclosed Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status, for
more information about the Appeals process.

You also have the right to contact the Taxpayer Advocate Service (TAS). TAS is an independent organization
within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing
a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS
assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.
gov or call 877-777-4778.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. TAS
cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a

petition in a United States Court.

If you have questions, contact the person at the top of this letter.

Sincerely,

Appeals Team Manager
Enclosures:
Publication 892
cc:

Letter 1371 (Rev. 12-2017)
Catalog Number 40683R


Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date: OCT 04 2018

Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend:
B =
C =
E =
F =
G =

UIL:
501.02-00

Dear Applicant:

We considered your application for recognition of exemption from federal income tax under Section 501 (a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify
for exemption under Section 501(c)(2) of the Code. This letter explains the basis for our conclusion. Please

keep it for your records.

Issues
Do you qualify for exemption under Section 501(c)(2) of the Code? No, for the reasons stated below.

Facts
You were formed in the state of B on C. Your Articles of Incorporation state that you are formed to a) hold title

to property, b) collect income therefrom, c) distribute income, less expenses, to member(s), and d) perform all
other acts necessary or incidental to the above.

You own commercial real estate which will be leased to unrelated tenants under arm’s length terms. You hold
title to properties, collect and distribute income from those properties, less expenses, to your sole member, G. G
is a disregarded entity with respect to F. F is a          organization established under the laws of E. You are
controlled by G, as they have authority to remove and/or replace directors for any reason. Upon dissolution all
assets shall be distributed to your member(s). Less than % of your income is received incidentally from the

holding of real property.

You assert that F is a charitable organization described in Sections 501 (c)(3) and 4945(b) of the Code.
However, F is not exempt under Section 501(c)(3).


Law
Section 501(c)(2) of the Code provides for the exemption from federal income tax of corporations organized for

the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire
amount thereof, less expenses, to an organization which itself is exempt under this section.

Treasury Regulation Section 1.501(c)(2)-1(b) states that a corporation described in Section 501(c)(2) cannot
accumulate income and retain exemption, but it must turn over the entire amount of such income, less expenses,

to an organization which is itself exempt under Section 501(a).

Revenue Ruling 69-381, 1969-2 CB 113, describes corporations organized to hold title to property for exempt
organizations. A title holding corporation that derives income from rental of real property to the general public

is not precluded from exemption under Section 501(c)(2) of the Code.

Application of law
You do not meet the requirements for recognition of tax exemption under Section 501(c)(2) of the Code. As you

turn all your income, less expenses, over to an organization that is not exempt under Section 501(a), you do not
meet the requirements of Treas. Reg. Section 1.501(c)(2)-1(b) and you are not exempt.

You are not like Rev. Rul. 69-381, because you are not holding title to property for the benefit of any exempt
organization under Section 501(c) of the Code.

Conclusion
Based on the information provided, you are not exempt under Section 501(c)(2) of the Code because you

distribute your income to a non-exempt foreign organization.

If you don’t agree
You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you

must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone
number

• A copy of this letter highlighting the findings you disagree with

• An explanation of why you disagree, including any supporting documents

• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

• One of the following declarations:

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K


3

For an officer, director, trustee, or other official who is authorized to sign for the organization:

Under penalties of perjury, I declare that I examined this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all

relevant facts and such facts are true, correct, and complete.

For authorized representatives:
Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all

relevant facts and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn’t
already done so. You can find more information about representation in Publication 947, Practice Before the

IRS and Power of Attorney.
We’ll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we’ll continue to process your case considering the information you provided. If you haven’t provided a

basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-

Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

Where to send your protest
Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable

address:

U.S. mail:

Internal Revenue Service

EO Determinations Quality Assurance
Room 7-008

P.O. Box 2508

Cincinnati, OH 45201

Street address for delivery service:

Internal Revenue Service

EO Determinations Quality Assurance
550 Main Street, Room 7-008
Cincinnati, OH 45202

You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.

If you agree
If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you

within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your
income tax filing requirements.

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K


You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If
you have questions, you can contact the person listed at the top of this letter.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

cc:

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K