If your organization wants to obtain recognition of exemption from
federal income tax as an organization organized for the exclusive
purpose of acquiring, holding title to, and collecting income from
real property, and turning over the entire amount less expenses to
member organizations exempt from income tax, it should file its
application on Form 1024. For a discussion of the procedures for
obtaining recognition of exemption, see chapter 1.
Who can control the organization.
Organizations recognized as exempt under this section may have up
to 35 shareholders or beneficiaries, in contrast to title-holding
organizations recognized as exempt under IRC 501(c)(2), which may have
only 1 controlling parent organization.
Organizational requirements.
A 501(c)(25) organization must be either a corporation or a trust.
Only one class of stock is permitted in the case of a corporation. In
the case of a trust, only one class of beneficial interest is allowed.
Organizations eligible to acquire or hold interests in this type of
title-holding organization are qualified pension, profit-sharing, or
stock bonus plans, governmental plans, governments and their agencies
and instrumentalities, and charitable organizations.
The articles of incorporation or trust instrument must include
provisions showing that the corporation or trust is organized to meet
the requirements of the statute, including compliance with the
limitations on membership and classes of stock or beneficial interest,
and compliance with the income distribution requirements. The
organizing document must permit the organization's shareholders or
beneficiaries to dismiss the organization's investment advisor, if
any, upon a vote of the shareholders or beneficiaries holding a
majority interest in the organization.
The organizing document must permit the shareholders or
beneficiaries to terminate their interests by at least one of the
following methods.
- By selling or exchanging their stock or beneficial interest
to any organization described in IRC 501(c)(25)(C), provided that the
sale or exchange does not cause the number of shareholders or
beneficiaries to exceed 35.
- By having their stock or beneficial interest redeemed by the
501(c)(25) organization upon 90 days notice.
If state law prevents a corporation from including in its
articles of incorporation the above provisions, such provisions must
instead be included in the bylaws of the corporation.
A 501(c)(25) organization may be organized as a nonstock
corporation if its articles of incorporation or bylaws provide members
with the same rights as described above.
Subsidiaries.
A wholly-owned subsidiary will not be treated as a separate
corporation, and all assets, liabilities, and items of income,
deduction, and credit will be treated as belonging to the section
501(c)(25) organization. Subsidiaries should not apply separately for
recognition of exemption.
Tax treatment of donations.
Donations to an exempt title-holding corporation generally are not
deductible as charitable contributions on the donor's federal income
tax return.
Unrelated Business Income
In general, the receipt of unrelated business income by a section
501(c)(25) organization will subject the organization to loss of
exempt status since the organization cannot be exempt from taxation if
it engages in any business other than that of holding title to
real property and collecting the income from the property.
However, exempt status generally will not be affected by the receipt
of debt-financed income that is treated as unrelated business taxable
income solely because of section 514.
Under section 514(c)(9), certain shareholders or beneficiaries are
not subject to unrelated debt-financed income tax under section 514 on
their investments through the organization. These shareholders are
generally schools, colleges, universities, or supporting organizations
of such educational institutions. Organizations other than these will
take into account as gross income from an unrelated trade or business
their pro rata share of income that is treated as unrelated
debt-financed income because section 514(c)(9) does not apply. These
organizations will also take their pro rata share of the allowable
deductions from unrelated taxable income.
Real property.
Real property can include personal property leased in connection
with real property, but only if the rent from the personal property is
not more than 15% of the total rent for both the real property and the
personal property.
Real property acquired after June 10, 1987, cannot include any
interest as a tenant in common (or similar interest) or any indirect
interest.
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