Facts: Not-for-Profit, Inc. (NFP) owns 60% of a For-Profit Corporation (FP).1 FP owns title to property (land)
Question:
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:
Expert Answer:
