Non and Unrelated Business Income: Non Core Revenue...

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Non‐Profits and Unrelated Business Income: Evaluating Non‐Core Revenue Streams Evaluating Non‐Core Revenue Streams Preparing for Tough Scrutiny of UBI by the IRS

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, JULY 11, 2012

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Patricia Jo Mayer, Senior Tax Manager, Moss Adams, San Diegoy , g , , g

Greg McRay, CEO, Foundation Group Inc., Nashville, Tenn.

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Non‐Profits and Unrelated Business I  E l ti  N C  R  Income: Evaluating Non‐Core Revenue Streams Seminar

July 11, 2012

Greg McRay, Foundation Group Inc.gmcray@foundationgroup.com

Patricia Jo Mayer, Moss Adamspatty.mayer@mossadams.com

Today’s Program

Latest Developments At The Federal Level[Patricia Jo Mayer]

Slide 7 – Slide 17

Developments With IRS Guidance On UBI[Greg McRay]

Form 990-T Issues

Slide 18 – Slide 49

Slide 50 – Slide 63[Patricia Jo Mayer]

Approaches For An NPO To Adjust To Federal Policy Shifts[Greg McRay]

Slide 64 – Slide 75[Greg McRay]

LATEST DEVELOPMENTS AT Patricia Jo Mayer, Moss Adams

LATEST DEVELOPMENTS AT THE FEDERAL LEVEL

Latest Developments AtThe Federal Level

‐ Housesubcommitteehearings

IRS compliance projects on colleges and universities‐ IRScomplianceprojectsoncollegesanduniversities

8

House Subcommittee Hearings

• Oct.6,2011:CongressmanCharlesW.BoustanyJr.,MD,chairmanoftheSubcommitteeonOversightoftheCommitteeonWaysandMeans,sentalettertotheIRSseekinginformationrelatingtoIRSd i i t ti d i ht f t tadministrationandoversightoftax‐exemptorgs.

‐ Corporategovernanceandcompliance‐ NewreportingrequirementsTEhospitals‐ Updateoncollegesanduniversitiescomplianceproject

• ChairmanBoustanyannouncedhearingonMay16,2012examiningoperationsandIRSoversightofTEorgs.Thisistobethefirstinaseries of hearing by the subcommittee on the TE sector and IRS

9

seriesofhearingbythesubcommitteeontheTEsectorandIRSoversightofTEactivities.

House Subcommittee Hearings (Cont.)

• Whenannouncingthehearing,ChairmanBoustanysaid:

– “Thisreviewallowsustoexaminethestateofthetax‐exemptsector,asitcurrentlyexiststoday,andconsiderthisinformationaswecontinuetheCommittee’seffortstowardcomprehensivetaxpreform.Inbothcases,thegoalisthesame‐ toensurethatthetax‐exemptsectorisoperatinginanefficientmannerandthatthelawsgoverningtax‐exemptorganizationsarebeingappliedfairlyandevenly.”

• Taxreformwasrarelymentionedduringtheactualhearing.

10

y g g

House Subcommittee Hearings (Cont.)

• Witnessesatthehearing:– RogerColinvaux(associateprofessor,ColumbusSchoolofLaw,theCatholicUniversityofAmerica)

– DianaAviv(presidentandCEO,independentsector)– JoanneDeStefano(VPforfinanceandCFO,CornellUniversity,testifyingonbehalfofNACUBO)y g )

– MichaelReiger(seniorVPoflegalandcorporateaffairs,VHAInc.)– BruceR.Hopkins(seniorpartner,PolsinelliShughart)

• Eachwitnessspokebrieflyandthenwasaskedthreetofourquestionsbythesubcommittee.

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College And University Study

• InterimreportreleasedMay7,2010

• 400compliancequestionnairessent;344responsesreceivedp q p

• 30examsopened

• Areasofinterest:– UBIactivities– Investment,managementanduseofendowmentfunds– Executivecompensation– Governance

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College And University Study: UBI

Q i S ll M di LQuestion Small Medium Large

NeverfiledForm990‐T 48% 29% 4%

E i d i i i i 23% 54% 82%

Question Small Medium Large

NeverfiledForm990‐T 48% 29% 4%

Engageinadvertisingactivity 23% 54% 82%

%reporting advertisingasUBI 6% 21% 53%

Engage in facility rental activity 57% 83% 95%

Engageinadvertisingactivity 23% 54% 82%

%reporting advertisingasUBI 6% 21% 53%

Engage in facility rental activity 57% 83% 95%Engageinfacility rentalactivity 57% 83% 95%%reportingfacility rental asUBI 11% 22% 41%

Relyonadvice ofoutsidecounselori d d f UBI i

36% 32% 39%

Engageinfacility rentalactivity 57% 83% 95%%reportingfacility rental asUBI 11% 22% 41%

Relyonadvice ofoutsidecounselor 36% 32% 39%independentaccountforUBIissuesindependentaccountantforUBIissues

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College And University Study: Investments And Compensation

Q ti S ll M di LQuestion Small Medium LargeHaveanendowment fund 87% 97% 100%

Engageinforeigninvestments 53% 67% 82%Conducteducationalprogramoutside U.S. 30% 54% 83%

Userebuttablepresumptionprocess 55% 71% 63%Highestpaidnon‐ODTKEFacultySportscoach

55% 49%16%

34%43%

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Compensation To Highest-Paid (In Thousands)

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College And University Study: Governance

Question Small Medium Large

Writtenconflict of interest for board and top 81% >85% 100%Writtenconflictofinterestforboardandtopmanagementofficial(private/public)

81%>85%

85%>95%

100%95%

Written( / bl )

conflictofinterestforfull‐timefaculty 58%84%

83%79%

100%80%(private/public) 84% 79% 80%

Followaformalwritten compensationpolicy 34% 61% 63%

Board approval of loans/extensions of credit to 44% 64% 75%Boardapprovalofloans/extensionsofcredittoODTKE

44% 64% 75%

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Colleges And Universities: Compliance

• TheIRSworkplan– ProjectsEOwillbeworkingoninFY2012

• Collegesanduniversities

IRS: EO is completing a wide ranging review– IRS:EOiscompletingawide‐rangingreview.

– Workingtofurtheranalyzequestionnairedataandtocompletei i f l d ll d i i iexaminationsofselectedcollegesanduniversities

– AfinalreportwillhighlightEO’sfindingsdrawnfromquestionnaire

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dataandexamresults.

DEVELOPMENTS WITH IRS Greg McRay, Foundation Group Inc.

DEVELOPMENTS WITH IRS GUIDANCE ON UBI

www.501c3.org

IRS Publication 598 (Tax on Unrelated Business Income of Exempt Organizations), revised March 2012g ),

First revision since 2010

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www.501c3.org

Federal tax deposits must be made by electronic funds transfer, or EFTPS.

Forms 8109 and 8109-B (federal tax deposit coupons) can no longer be used.be used.

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www.501c3.org

For large corporations, special rules apply for estimated tax payments that are required to be made for the period including p y q p gJuly, August or September 2012, and the months immediately following these months.

Corporations with more than $1 billion of assets must pay a higher installment percentage than is required for smaller organizations.

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www.501c3.org

The maximum cost of a low-cost article, for organizations eligible to receive charitable contributions, was increased from $9.50 to , $$9.70.

Involves the distribution of low-cost articles incidental to soliciting Involves the distribution of low cost articles incidental to soliciting charitable contributions

Started at $5 and has been indexed annually to inflation Started at $5 and has been indexed annually to inflation

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www.501c3.org

The annual limit on associate member dues received by an agricultural or horticultural organization and that are not treated g gas gross income increased from $145 to $148,

Involves 501(c)(5) organization non-voting member dues, primarily Involves 501(c)(5) organization non voting member dues, primarily

UBI involved with other 501(c)(5) or (c)(6) groups

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www.501c3.org

IRS Publication 598 available at: http://www.irs.gov/pub598

24

www.501c3.org

Every year, IRS issues “work plans” for various jurisdictional areas.

This obviously includes the Exempt Organizations wing of the Tax Exempt and Government Entities Division.

Under signature of Lois G. Lerner, Director of EO

25

www.501c3.org

2012 Work Plan will analyze situations in which the organization filed a Form 990 returns on which it reporting UBI, but filed no p g ,Form 990-T.

IRS is not focusing on situations with less than $1,000 gross UBI IRS is not focusing on situations with less than $1,000 gross UBI (the limit before which Form 990-T is required).

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www.501c3.org

IRS will be analyzing Form 990-T data to develop “risk models” that will help identify organizations that consistently report p y g y psignificant gross receipts from unrelated business income, but declare no tax due.

EO will use this work in conjunction with a coming “UBIT compliance project.”

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www.501c3.org

Organizations having more than $1,000 of UBI on Form 990, but no Form 990-T, will receive an inquiry and could be subject to audit., q y j

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www.501c3.org

McGladrey LLP has called attention to Form 990, lines 7a & 7b as being on the IRS radar for particular scrutiny.g p y

7a: Total unrelated business income

7b: Net unrelated business income

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www.501c3.org

Private letter rulings are written decisions by the IRS in response to taxpayer requests for guidance. A private letter ruling binds p y q g p gonly the IRS and the requesting taxpayer. Thus, a private ruling may not be cited or relied upon as precedent. The IRS does have the option of redacting the text of a private ruling and issuing it as a revenue ruling, which becomes binding on all taxpayers and the IRS. Some private letter rulings are ultimately published as a public revenue ruling and become binding on the IRS for all ttaxpayers.

30

www.501c3.org

PLR 201218015: Endowment unit payouts are not UBTI (unrelated business taxable income).)

◦ Educational, 501(c)(3) organization was the trustee of six trusts and the legal owner of the trusts’ assets.and the legal owner of the trusts assets.

◦ Organization was the sole beneficiary of five of the trusts and a 50% beneficiary of the sixth. Organization was responsible to 50% beneficiary of the sixth. Organization was responsible to distribute other 50% to other charitable, educational organizations.

31

www.501c3.org

PLR 201218015: Endowment unit payouts are not UBTI (unrelated business taxable income), Cont.),

◦ Organization had invested in both traditional stocks and bonds and in non-traditional assets such as private equity, flexible and in non traditional assets such as private equity, flexible capital, natural resources, inflation hedging and real estate.

32

www.501c3.org

PLR 201218015: Endowment unit payouts are not UBTI (unrelated business taxable income), Cont.),

◦ Organization sought to create a contractual obligation with each trust to issue (sell) proportionate shares, or “units,” of its trust to issue (sell) proportionate shares, or units, of its endowment.

◦ This would entitle the trusts to receive periodic payments based This would entitle the trusts to receive periodic payments based upon the number of units owned.

33

www.501c3.org

PLR 201218015: Endowment unit payouts are not UBTI (unrelated business taxable income), Cont.),

◦ Trusts would receive investment returns equal to that of the endowment.endowment.

◦ Trusts would receive quarterly earnings payments from the organization, based upon a distribution formula.organization, based upon a distribution formula.

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www.501c3.org

PLR 201218015: Endowment unit payouts are not UBTI (unrelated business taxable income), cont.),

◦ Trusts would have interest in the endowment itself by virtue of its purchased units, but not in its underlying investments.its purchased units, but not in its underlying investments.

35

www.501c3.org

PLR 201218015: Endowment unit payouts are not UBTI (unrelated business taxable income), Cont.),

◦ Bottom line: Are unit purchase payments or payouts UBTI?

36

www.501c3.org

PLR 201218015: Endowment unit payouts are not UBTI (unrelated business taxable income), Cont.),

◦ NO – The IRS found that the issuance of units from the organization to the trusts, the making of or receipt of payments organization to the trusts, the making of or receipt of payments with respect to the units, and the holding and redemption of units will not generate UBTI to the organization.

◦ Investing for the benefit of co-beneficiaries, ad the same time g ,as for the organization, was distinguished from commercial activity.

37

www.501c3.org

PLR 201125043: Non-profits are not prohibited from providing goods or services to a for-profit subsidiary.g p y

◦ 501(c)(3) organization had primary activities of the development of “D,” “E” and the dissemination of “B” information … all for of D, E and the dissemination of B information … all for benefit of the general public.

38

www.501c3.org

PLR 201125043 (Cont.)

◦ Activities were global, through a network of controlled organizations.

◦ Principal business location was in the U S but there were ◦ Principal business location was in the U.S., but there were several foreign subsidiaries

◦ Challenge: Growing industry affected the ability to continue “B” public service, so the organization sought to restructure by public service, so the organization sought to restructure by transferring “E” and other activities to for-profit subsidiaries.

39

www.501c3.org

PLR 201125043 (Cont.)

◦ Organization would keep the core charitable and public educational activities, and retain ownership and management of shares of “E” businesses.shares of E businesses.

◦ The stated reason for change was that a new structure would allow preservation and increase in value of “E” activity, and …

40

www.501c3.org

PLR 201125043 (Cont.)

◦ Restructuring would enable the use of stock of the for-profit as “acquisition currency,” rather than cash or debt, to acquire other entities as part of a geographic and product line expansion other entities as part of a geographic and product line expansion strategy.

◦ Can also attract prospective partners by offering non-controlling equity investment in a for-profit corporationq y p p

◦ Can also attract and retain key employees with equity-based compensation system

41

www.501c3.org

PLR 201125043 (Cont.)

◦ The plan was to form one or more domestic stock corporations (D-subs) and transfer physical assets, contracts and employees associated with “E” activity.associated with E activity.

◦ Then, transfer X% of stock in D-subs to “NewCo,” a wholly-owned for-profit subsidiary, in exchange for Class A common stock of NewCo

◦ Key point: No acquisition debt involved

42

www.501c3.org

PLR 201125043 (Cont.)

◦ The same scenario would take place with foreign stock corporations (F-subs).

◦ The organization would be the majority shareholder of stock in ◦ The organization would be the majority shareholder of stock in NewCo and would directly control NewCo and indirectly control D/F-subs.

◦ B class stocks, if any, would be for outside investors and others B class stocks, if any, would be for outside investors and others and would not be voting shares.

43

www.501c3.org

PLR 201125043 (Cont.)

◦ A key part of the plan was to shift a distribution agreement with an independent party, “P,” from the organization to NewCo, for “E” activities.E activities.

◦ Needless to say, this would be easier to grasp if we knew specifics!specifics!

44

www.501c3.org

PLR 201125043 (Cont.): IRS Rules on five questions (two on UBIT)

◦ The transfer of assets and liabilities related to “E” activities ultimately to NewCo will NOT result in any UBTI (unrelated business taxable income), within the meaning of Sect. 511-514.business taxable income), within the meaning of Sect. 511 514.

◦ Revenue generated through the distribution agreement between “P” and NewCo will be treated as if it was still between organization and “P,” because the nature has not changed. g , gTherefore, there is no UBTI.

45

www.501c3.org

The IRS has been ratcheting up the expectation that a major focus on UBIT is coming.g

2012 Work Plan discusses an upcoming project, but no one sure what that is.what that is.

46

www.501c3.org

One of the biggest hints came in an address by Marcus Owens, former EO Director, back in October 2010.,

“Voluntary” compliance questionnaires were sent to tax-exempt hospitals in 2006, addressing community benefit and executive compensation.p

Questionnaires later were sent to a cross-section of small, mid-sized and large private and public four-year colleges. They focused on UBI, endowments and executive compensation., p

47

www.501c3.org

Owens declared that the IRS was using the questionnaires to gauge taxable activity in “targeted” areas, andy g ,

That UBIT was “tailor-made” for a large-scale compliance check.

Especially since the last substantial look was in 1986

48

www.501c3.org

Given that the 2012 Work Plan indicated a potential UBIT project is forthcoming, it is reasonable to guess, absent other evidence, g, g , ,that the IRS EO division may well be warning tax-exempt hospitals and educational institutions of coming examinations.

Form 990-T analysis may hint at other possible targets.

49

FORM 990‐T ISSUESPatricia Jo Mayer, Moss Adams

99

990-T Issues990-T Issues

• Allocations of costs and expensesAllocationsofcostsandexpenses

• IRSislookingatSect.482onallocationofexpensestoUBIT.

• UBITonalternativeinvestments

51

Allocating Costs And Expenses

• TheCodeprovidesforthedeductibilityofdirectcostsincurredinearningtheincome,aswellasareasonableallocationofindirectcosts.

I l S 512( )(1) UBTI d f d– Ingeneral,Sect.512(a)(1)– UBTIisdefinedasgrossincomederivedfromanyunrelatedtradeorbusinessregularlycarriedonbyit,lessotherwisealloweddeductionsthatare“directlyconnected”(withcertainmodifications).

• Meetrequirementsofsections162,167andotherrelatedprovisions

• Must be proximately and primarily related to the business• Mustbeproximatelyandprimarilyrelatedtothebusinessactivity

52

Allocating Costs And Expenses (Cont.)

• Thereareanumberofrecognizedallocationmethodsthatcanbeused:

– Timesheetsorothertime‐trackingmethodsg– Squarefootage,ifapplicable– GrossincomeAdvertising lineage– Advertisinglineage

– Anyotherreasonableandconsistentmethod

53

Allocation Of Costs And Expenses (Cont.)

• Dualuse– Dualuseoffacilitiesinboththeexemptfunctionandforcommercialpurposes• Example:Amuseumhasatheaterthatitusestoshoweducationalandcommercialfilms.

• Theeducationalfilmsarelikelyrelated.

• The commercial films are probably UBI• ThecommercialfilmsareprobablyUBI.

54

Allocation Of Costs And Expenses (Cont.)

• Dualuse(Cont.):

Allocationofexpensesona“reasonablemethod”p

1. RensselaerPolytechnicInstitute:Allocationbasedonuse

2. IRSpreferredmethod:Allocationbasedonavailabilityforuse1. NOTbeingchallenged,since1.512(a)‐1permits

“ bl th d”“reasonablemethod”

55

Allocation Of Costs And Expenses (Cont.)

• Exploitation

– Anactivitybeyondwhatisnecessarytoaccomplishtheexempty y y p ppurposeissubjecttoUBIT.

• Example: The sale of milk by an experimental dairy farm wouldExample:ThesaleofmilkbyanexperimentaldairyfarmwouldnotproduceUBI.

• But the sale of ice cream produced with the milk product• But,thesaleoficecreamproducedwiththemilkproductwould.

M l t f ti t ff t UBI bj t t

56

– MayapplyexemptfunctionexpensestooffsetUBI,subjecttocertainlimitations

Allocation Of Costs And Expenses (Cont.)

• Limitationsoncertaindeductions:

– Related‐partyrules(Sect.267)p y ( )– Uniformcapitalizationrules(263A)– Mealsandentertainment(274(n))Travel companions– Travelcompanions

– Propertyleasedtoexemptentities– Fines,penalties,kickbacks– Lobbying,etc.

57

Other DeductionsOther Deductions

• Netoperatingloss

– Prioryear’sNOLsgenerated,utilizedandremaining(attachy g g (schedule)

– Make sure activities generating NOLs are trade or businessMakesureactivitiesgeneratingNOLsaretradeorbusiness

K ll d f t d NOL if t l t d f i– KeepallrecordsofgeneratedNOLs,ifgetselectedforexaminfuture

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– NOLavailableforcarryback2years;forward20.Forms1139or990‐T

Other Deductions (Cont )Other Deductions (Cont.)

• Charitablecontributions:Cantakeadeductionforcharitablecontributions,regardlessofwhetherrelatedtounrelatedactivity,subjectto10%corporateor50%trustlimitations

• StateUBITfilings/taxes:Makesureapplicablestaterequirementsarebeingmet.Ifpayingstatetax,takedeductiononfederal990‐T(cashoraccrualmethod)

• Taxpayments:MustbedonethroughEFTPSp y g

• 990‐T:Availableforpublicinspection

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Sect 482Sect. 482

• IRSreferencestransferpricingprinciplesunder§482duringexams.– IRShasindicatedthisisanareaofinterestduringexams.– Beaware,anddon’tbeoverlyaggressivewhenallocatingexpensesy gg g p

• Sect.482isonlyavailablefortheuseoftheIRS,notoftaxpayers.

– Inanycaseoftwoormoreorganizationsownedorcontrolledbysameinterests,thesecretarymaydistribute,apportionorallocategross income deductions credits or allowances between or amonggrossincome,deductions,creditsorallowancesbetweenoramongsuchorganizations,tradesorbusinesses,ifnecessarytopreventevasionoftaxesorclearlyreflectincome.

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Sect 482 (Cont )Sect. 482 (Cont.)

• Allocationofincomeanddeductionsamongtaxpayers:

– Arm’s‐lengthstandardg– Bestmethodsrule– ComparabilityArm’s length range– Arm s‐lengthrange

– Correlativeallocations(increaseincomeofonemember,correspondingdecreaseinincomeofothermember)

61

UBIT On Alternative Investments

• Alternativeinvestments– Partnerships

• Domestic• Foreign

If a joint venture is a member of a second JV which is a member of– IfajointventureisamemberofasecondJV,whichisamemberofathirdJV,theactivitiessimilarlypassthroughtotheexemptorg.

P t hi K 1 B 20 “V” d l t d k t– PartnershipK‐1:Box20“V”code– evaluateandasktaxpreparers;notalwaysdonecorrectly.

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• ScorporationK‐1income– allUBIT

UBIT On Alternative Investments (Cont.)

C id i ti i f i ti th t i t i U S• ConsiderinvestinginaforeigncorporationthatinvestsinaU.S.partnershipthathasdebt‐financedsecuritiesorrealestate.Incomefromtheforeigncorporationwillbedividends,notUBIT.

• Foreignreporting:– Considerfiling990‐Ttoreportforeignactivity– 990onGuidestar.org,990‐Tnotyet.

• Foreignforms– Form926 (returnbyaU.S.transferorofpropertytoaforeigncorporation)

– Form5471 (informationreturnofU.S.personwithrespecttocertainforeigncorporations)

– Form8865 (returnofU.S.personswithrespecttocertainforeignpartnerships)

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p p )

APPROACHES FOR AN NPO TO Greg McRay, Foundation Group Inc.

ADJUST TO FEDERAL POLICY SHIFTSSHIFTS

www.501c3.org

UBI/UBIT is not a fundamentally bad concept.• Affords NPOs with alternative stream of additional incomeAffords NPOs with alternative stream of additional income• Can be especially useful during tough economic times• Can expose the organization to a broader audience• May be unavoidable in certain complex situations• May be unavoidable in certain complex situations

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www.501c3.org

UBI/UBIT is not a fundamentally bad concept (Cont.)• If business activity it is generally well definedIf business activity, it is generally well defined

• If it constitutes a bona-fide trade or business• Is regularly conducted, and

Not s bstantiall related to the e empt p rpose of the • Not substantially related to the exempt purpose of the organization

66

www.501c3.org

UBI/UBIT is not a fundamentally bad concept (Cont.)

• It IS manageable, if you understand what’s required• Segregate it

Follow the rules• Follow the rules• Report on Form 990-T• Pay taxes

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www.501c3.org

Inherent UBI problems

• IRS scrutiny – more on the way• Public perception – easily misunderstood• Can distract team from the charitable mission• Can distract team from the charitable mission• Hassle factor can make it not worth the effort• Possible legal liability for program activities involved

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www.501c3.org

Inherent UBI problems (Cont.)

• Percentage limitations can come into play quickly• 5% or less of total gross revenue is generally safe.• 5% to 20% is a typical range• 5% to 20% is a typical range.• 20%-plus is potentially troublesome.

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www.501c3.org

UBI-avoidance Ideas• Tweak activity to bring in-line with charitable missionTweak activity to bring in line with charitable mission• Convert advertising to sponsorship acknowledgement• Restructuring royalty and licensing agreements• Passive instead of active involvement in revenue-generating • Passive instead of active involvement in revenue-generating

activity• Volunteer labor instead of paid staff

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www.501c3.org

IRS is looking at revenue streams

• Is it truly related to an exempt purpose?

• IRS applying “fragmentation rule” to parse activity• IRS applying fragmentation rule to parse activity• If an activity is conducted on a scale, larger than is

reasonably necessary to perform an exempt purpose

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www.501c3.org

IRS is looking at revenue streams (Cont.)

• Current focus on activity exerted by NPO in support of cause marketing/joint ventures

• Is UBI revenue as a percent of total revenue getting too high?

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www.501c3.org

How to properly structure a taxable subsidiary

• Must have bona fide purpose• Subsidiary must have real purpose, not a sham; purpose

does NOT have to be profit motive howeverdoes NOT have to be profit motive, however

• Not an instrumentality of parentControl can be exercised by non profit parent through • Control can be exercised by non-profit parent through stock ownership and some overlapping governance, but the day-to-day operations must be separate from the parent.

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www.501c3.org

How to properly structure a taxable subsidiary (Cont.)

• Subsidiary should be its own entity• Needs to be taxed as C corporation to avoid back-end UBIT• Revenue needs to be in form of dividends• Revenue needs to be in form of dividends• Rents, royalties, interest is UBI if from controlled subsidiary

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www.501c3.org

How to properly structure a taxable subsidiary (Cont.)

• Maintain strict separation• Records, monies, books• Governance (can have overlap)• Governance (can have overlap)• Management

• Control relationship, but not business itself

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