UBIT consequences of certain passive income from subsidiaries.
Author | Mackay, Jim |
Position | Unrelated business income tax - Brief Article |
Sec. 512(b) (13) basically provides that payments of interest, annuities, royalties and rents from a controlled organization to its tax-exempt parent are unrelated business income to the parent. The theory behind the statute is that, since a controlled taxable organization would deduct the payments from its income and minimize or eliminate taxable income, there should not be a double benefit by allowing the parent to exclude the payments from income. Sec. 368(c) defines a controlled organization as an 80% ownership interest.
Recently released Letter Ruling 9542045 provides that where a tax-exempt organization owns stock of a company derivatively through its subsidiary, the Sec. 368(c) definition has not been met.
It is clear that if an activity was spun off to an 80%-owned first-tier subsidiary, Sec. 512(b) (13) would apply. However, in Letter Ruling 9542045, the tax-exempt parent set up a controlled first-tier holding company subsidiary and further set up a second-tier subsidiary to carry on the production activities. By interposing...
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