TIGTA Issues New Audit Plan

• DOI: http://doi.org/10.1002/npc.30796
• Date: 01 December 2020
• Published date: 01 December 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

December 2020 3

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

taxation of these distributions again pursuant to this excise

tax would lead to double taxation. Thus, the final regula-

tions also exclude from the definition of related organiza-

tion taxable corporations and certain taxable trusts (id.).

Further so excluded are partnerships, S corporations, and

other pass-through entities, a portion of the income of

which flows through to an educational institution (id.).

Although the first three of these categories requires

control, the statute, as noted, does not define the term.

The proposed regulations utilized the concept of control

used in the controlled subsidiary context (IRC § 512(b)

(13)(D)). That approach did not survive the comment

process. The final regulations provide separate rules for

the different relationships that may exist and separately

define control for purposes of the three control relation-

ships (Reg. § 53.4968-3(b)(1)-(3)).

An organization controls an educational institution if

(1) the organization owns (by vote or value) more than 50

percent of the voting and nonvoting stock or membership

interest of the institution or (2) the organization (or one or

more of its managers) can (a) appoint or elect more than

50 percent of the members of the institution’s governing

body or otherwise has the ongoing power to appoint or

elect more than 50 percent of the members with rea-

sonable frequency, (b) require the institution to make an

expenditure or prevent the institution from making an

expenditure, or (c) require the institution to perform any

act that significantly affects its operations or prevent it

from performing an act (Reg. § 53.4968-3(b)(1)).

A tax-exempt corporation is controlled by an edu-

cational organization if the institution owns (by vote or

value) more than 50 percent of the voting and nonvoting

stock or membership interest of the corporation (Reg. §

53.4968-3(b)(2)(i)).

An organization (other than an entity that is not a

related one) is controlled by one or more persons that

also control the educational institution if more than 50

percent of the members of the governing body of the

other organization are directly or indirectly controlled

by persons that comprise more than 50 percent of the

members of the governing body of the institution (Reg.

§ 53.4968-3(b)(3)).

As to the circumstances where a trust is deemed to

have a relationship with an educational institution com-

parable to the concept of control, the final regulations

were substantially revised. They provide that a trust is a

related organization and there is deemed control only (1)

if the educational institution is substantially the sole per-

missible trust beneficiary or appointee of both income

and principal, (2) if the trust is a pooled income fund, (3)

to the extent the assets of the trust were contributed to

the trust by the institution or a controlled entity, or (4) to

the extent the institution or a controlled entity has the

right to demand or otherwise cause distribution of prin-

cipal from the trust to the institution or controlled entity

(Reg. § 53.4968-3(b)(2)(ii)(A)).

The rule as to control of nonstock organizations in

the proposed regulations was revised. Pursuant to the

final regulations, an educational institution controls a

nonstock organization if the institution (or one or more

of its managers) can (1) appoint or elect more than 50

percent of the members of the organization’s governing

body or otherwise can appoint or elect that majority

with reasonable frequency, (2) require the organization

to make an expenditure or prevent it from making an

expenditure, or (3) require the organization to perform

any act that significantly affects its operations or prevent

it from performing such an act (Reg. § 53.4968-3(b)(2)

(iii)). Employee benefit funds are not related organiza-

tions for these purposes (Reg. § 53.4968-3(a)(3)).

A related organization’s assets and net investment

income are generally taken into account, for purposes of

calculation of the excise tax, in determining whether an

institution is an applicable educational institution and in

computing the net investment income of an educational

institution. If an organization is a related organization

with respect to an institution under more than one of

these definitions, the rule that attributes the largest

amount of assets and net investment income to the insti-

tution must be applied (Reg. § 53.4968-3(d)(1)).

There are three exceptions to this attribution rule, one

being the above-referenced rule that assets that are used

directly in carrying out the institution’s exempt purpose

are not part of the excise tax base. In determining the

attributions, assets and net investment income of a related

organization are not taken into account with respect

to more than one educational institution; there is to be

an allocation between or among the institutions (IRC §

4968(d)(1)(A); Reg. § 53.4968-3(d)(2)(i)). Unless a related

organization is controlled by the educational institution or

is a supporting organization with respect to the institution,

assets and net investment income of a related organi-

zation that are not intended or available for the use or

benefit of the institution are not taken into account by the

institution (IRC § 4968(d)(1)(B)); Reg. § 53.4968-3(d)(2)(ii)).

Impact on Institutions

The Treasury Department and the IRS state in the

preamble to these final regulations that they reduce, in

relation to the proposed regulations, the recordkeeping

burden for the colleges and universities that are subject

to the excise tax. Only about 1.7 percent of four-year insti-

tutions are expected to be affected by the tax. [11.9(b)] ◆

TIGTA ISSUES NEW AUDIT PLAN

The Office of the Treasury Inspector General for Tax

Administration issued its 2021 Annual Audit Plan on

October 6. Here is what TIGTA has in store in the tax-ex-

empt organizations context: