Exempt organizations: basis of property at the time of loss of exemption or transfer to taxable subsidiary.

• Author: Snowling, Randall
• Position: Brief Article

When an exempt organization with assets used in an exempt function transfers the assets to a taxable subsidiary or loses its exemption, the basis of the assets at the time of the transfer is their original cost, reduced for exhaustion, wear and tear, obsolescence, amortization and depletion during the period the organization was not subject to tax. This is the case even though the exempt organization may not have provided depreciation in its financial statements.

General rule

The basis of an asset is required to be reduced for exhaustion, wear and tear, obsolescence, amortization and depletion, to the extent that the amount was "allowed or allowable" as a deduction in computing taxable income (Sec. 1016(a)(2) and Regs. Sec. 1.1016-3). The question then arises as to what is the proper basis for purposes of depreciating property when the exempt organization loses its status or transfers assets for use in a taxable unrelated business, and no tax benefits were previously realized from these assets by reason of their prior exempt use.

Sec. 1016(a)(3)(B) provides that an adjustment is required to the basis of property for the period it was held by a person or organization not subject to tax. Regs. Sec. 1.1016-4(a) further indicates that an adjustment is required if the amounts are "actually sustained." Regs. Sec. 1.1016-4(b) describes amounts "actually sustained" as the amounts charged off on the taxpayer's books when the amounts are considered by the IRS to be reasonable. Otherwise, the amount "actually sustained" is the amount that would have been allowable...