Facts: Not-for-Profit, Inc. (NFP) owns 60% of a For-Profit Corporation (FP).1 FP

owns title to property (land) leased to NFP. The lease rental amounts from NFP are equal

to reimbursement to FP for maintenance, property taxes and other incidental expenses

related to the leased property. Thus, FP pays no income taxes because the rental income

from NFP is completely offset by the maintenance and property taxes, etc. incurred by

FP. FP also has net operating loss (NOL) carryforwards.

Pursuant to the lease agreements, leasehold improvements made by NFP, which are

substantial, revert back to FP at the end of the lease. However, these long-term leases

have been renewed regularly over several decades.

The property has become extremely valuable over the years and is located in an upscale

residential neighborhood. This leased property could be used for other purposes, which

would yield much higher returns to FP than the related party lease with NFP.

FP has not applied (nor does it intend to) for Title Holding Company status with the IRS,

which would require amendments to FPs certificate of incorporation and bylaws and

related shareholder approvals. Title Holding Companies are tax exempt entities. 26

U.S.C. 501(c)(2).

Neither FP nor NFP have disclosed in their respective audited separate or consolidated

financial statements any Uncertain Tax Positions (UTP) (See FASB Interpretation

No. 48 (Codified at ASC 740-10). Nor have FP or NFP disclosed on their respective

federal tax returns that FP or NFP have any UTPs (these would be reported on Schedule

UTP (Form 1120 for FP) and Schedule D (Form 990 for NFP). Instead, primarily relying

upon GCM 35188 (attached), both FP and NFP have taken the position that they are not

required to disclose any UTPs.

Relevant Law: IRC 482, 501(a), 501(c)(2),(7), and related IRS regulations and

rulings, GCM 35188 (1973-419); see also Instructions for Schedule UTP (Form 1120),

Instructions for Form 990 (Schedule D and Part XIII), FASB Interpretation No. 48

(2009).2 For purposes of this project, it is assumed that FP and NFP are related parties

under federal income tax law (see IRC 267(b), 318(a), 707(b)).

Issue: Does NFP or FP have UTP disclosure requirements under federal tax law?

Instructions: After conducting the appropriate research and analysis, prepare a research

memorandum (see 4007 of text). Use proper legal citations. Optional: You also may

attach legal briefs of pertinent case law (see 3019.03 of text).

ANALYSIS:

CONCLUSION: