How to tax a nonprofit?


E

eagent

First some background - remember the names have been changed to
protect the participants, but I assure you that the facts as stated
are accurate.

There is a very old organization that was chartered by the Maryland
legislature on February 8, 1822 - YES, that date is correct 02/08/1822
- Long before MD SDAT ever existed.

It is a non-stock, non-profit organization that is NOT tax exempt.
I'll not get into why it isn't tax exempt, just accept that it is NOT
and NEVER will be tax exempt.

There are many local chapters of this group which have organized
(opened and closed) over the years. All of the local chapters come
under the care and guidance of the parent organization. None of the
local chapters are allowed to form via the Secretary of State nor are
they allowed to file for or obtain Federal or State ID numbers. I
know this sounds odd, but trust me this is allowed by the Maryland
when the parent organization formed back in 1822 - before we had all
the hoops we jump through now.

Many of these local chapters formed Holding Companies for the sole
purpose of owning the land and building where they held their
meetings. The vast majority of these holding companies are all
organized as nonstock, nonprofit entities and they all have Federal
and State ID numbers. NONE of these holding companies are tax exempt
- they do NOT enjoy 501(c)(3) status.

The local chapters owned their meeting houses but over the years
they've turned the real property over to the holding companies to
manage - I won't get into why so don't ask, just trust me that it is
perfectly legal.

The holding companies usually have very little income - they lease the
use of the buildings back to the local chapters under a triple net
lease agreement, thereby shifting all the costs of operation back to
the local chapter. The local chapter is supported by dues and
donations from the membership.

Most of the local chapters and their associated holding companies have
had so little income that they have never, ever had to file an income
tax return. For the vast majority of these groups the income - income
is too strong a word, really - let's say the money that changes hands
- is in the $10,000 OR LESS per year range. So they have never filed
an income tax return because one was never required.

NOW we get to the meat of the problem -

One of the local holding companies has recently sold the building that
they owned. It was in a historic district and fetched a very nice
price for the group - just shy of $1,000,000 dollars. Here's the
problem -

The building that they sold was (supposedly) acquired in a tax free
exchange many years ago, but no one knows exactly when. There are no
documents supporting the exchange.

No one knows when the old building was acquired or what it cost. The
old building was owned by, controlled by or in the hands of (take your
pick) the local holding company for well over 100 years before it was
exchanged for the new building.

So -

I can do the math to calculate the gain - assuming I can find
something to use as basis -

BUT ON WHAT FORM DO WE REPORT THE GAIN AND PAY THE TAX?

Form 990 seems to be for tax exempt entities which this group is NOT.

They clearly are NOT an LLC or a partnership so 1065 is OUT -
Similarly, we can't use Form 1120S.

I always thought Form 1120 was for "For-Profit" corporations - which
this holding company is NOT! Also, as a side note, the group
understands that tax may be due on the gain, but they are hoping to
pay tax as long term capital gains and Form 1120 has NO SUCH provision
- C Corporations don't get the LTCG tax bracket break.

I don't really do much work in this area. And even though I'm an EA
and have been practicing for more than 25 years, for the life of me, I
cannot get my head around this one.

Any ideas or suggestions on what form to use to report the gain?

I'll answer the questions I can and try to explain why I can't answer
the ones I can't. While this is a well known organization, I am
trying my best to keep the players as confidential as I can.

I assure you that this issue is on the level,
Gene E. Utterback, EA, RFC, ABA
If you like, you may contact me off the NG at gene at alliancetax dot
com
 
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H

Harlan Lunsford

eagent wrote:

(a whole bunch snipped here for brevity's sake.)
One of the local holding companies has recently sold the building that
they owned. It was in a historic district and fetched a very nice
price for the group - just shy of $1,000,000 dollars. Here's the
problem -

The building that they sold was (supposedly) acquired in a tax free
exchange many years ago, but no one knows exactly when. There are no
documents supporting the exchange.

No one knows when the old building was acquired or what it cost. The
old building was owned by, controlled by or in the hands of (take your
pick) the local holding company for well over 100 years before it was
exchanged for the new building.

So -

I can do the math to calculate the gain - assuming I can find
something to use as basis -

BUT ON WHAT FORM DO WE REPORT THE GAIN AND PAY THE TAX?

Form 990 seems to be for tax exempt entities which this group is NOT.

They clearly are NOT an LLC or a partnership so 1065 is OUT -
Similarly, we can't use Form 1120S.

I always thought Form 1120 was for "For-Profit" corporations - which
this holding company is NOT! Also, as a side note, the group
understands that tax may be due on the gain, but they are hoping to
pay tax as long term capital gains and Form 1120 has NO SUCH provision
- C Corporations don't get the LTCG tax bracket break.

I don't really do much work in this area. And even though I'm an EA
and have been practicing for more than 25 years, for the life of me, I
cannot get my head around this one.

Any ideas or suggestions on what form to use to report the gain?

I'll answer the questions I can and try to explain why I can't answer
the ones I can't. While this is a well known organization, I am
trying my best to keep the players as confidential as I can.
I think IRS would say to use form 1120, which isn't just for
corporations, but also for associations which have the characteristics
of corporations.

At least that's what I remember from 25 years ago! (grin)

ChEAr$,
Harlan
 
G

Gil Faver

Harlan Lunsford said:
eagent wrote:

(a whole bunch snipped here for brevity's sake.)
(thank you, and even more snipped)
I think IRS would say to use form 1120, which isn't just for corporations,
but also for associations which have the characteristics
of corporations.

At least that's what I remember from 25 years ago! (grin)
we have a nonprofit corporation, that is not tax exempt. we use form 1120.

You are right there are no capital gain tax breaks for corporations. You
will pay through the nose.
 
S

Seth

eagent said:
The vast majority of these holding companies are all
organized as nonstock, nonprofit entities and they all have Federal
and State ID numbers. NONE of these holding companies are tax exempt
- they do NOT enjoy 501(c)(3) status.
Could they be 501(c)(7) (social club) or the like? Those are also tax
exempt, but donations are not deductible.
One of the local holding companies has recently sold the building that
they owned. It was in a historic district and fetched a very nice
price for the group - just shy of $1,000,000 dollars. Here's the
problem -
Even if they were a nonprofit, wouldn't that be Unrelated Business
Taxable Income?

Seth
 
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D

dpb

eagent wrote:
....
The building that they sold was (supposedly) acquired in a tax free
exchange many years ago, but no one knows exactly when. There are no
documents supporting the exchange.

No one knows when the old building was acquired or what it cost. The
old building was owned by, controlled by or in the hands of (take your
pick) the local holding company for well over 100 years before it was
exchanged for the new building.
Unless fire or other calamity, there surely are records at the Register
of Deeds office of the appropriate municipality. Depending on their
methods, it may be a research in musty paper files as opposed to
microfilm or such, but I'd lay odds are pretty good that there are
records--it's how much effort it's worth to try to resurrect them.

It doesn't seem so important that the old building goes back so far in
the possession of the lodge, but when the transaction to the "new"
building took place. It would seem likely that a search of local
history in the era in which it must have happened (and it would seem
likely that there has to be at least enough local entity history that
there's at least a clue as to when that might have been) would be able
to find references to the event.

If nothing else for basis, figure out roughly when the building was
built and what it might have been as a cost and work from there.

In current dollars, it's probably not going to be much, unfortunately.

--
 

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