BldgCorpThreat

Building Corp Threat

An IRS ~~proposed~~ regulation holds a nasty surprise for some unions' building corps (and for other taxable subsidiaries of tax-exempt organizations).

Background: Many unions hold title to real property through title-holding corporations. A properly formed title-holding corp can be exempt from taxation under §501(c)(2) of the Internal Revenue Code. Often, however, the incorporation of the building corp included extraneous language that prevented the corp from qualifying under 501(c) (2). Although such corps were then subject to income tax, there was rarely any tax paid, because the union usually paid enough rent to break-even (or paid no rent).

The only problem arises when the union wants to sell the building, because the taxable gain could then be substantial. The solution was to amend the title holding corp to include the correct language, and re-file for exemption under 501(c)(2).

In January, however, the IRS published proposed regulations that would treat a conversion to tax-exempt status as a taxable liquidation of the predecessor corp. This means that even if your union does not actually sell it's building, if you convert your building corp to tax-exempt status, IRS will treat the conversion as if it were a taxable sale!

[In NY, many building corps that qualified under 501( c)(2) for federal purposes, were formed under provisions that made them taxable entities for state tax purposes. These entities should consider correcting their status under state law ASAP, before the state tries to use the proposed regs against them.]

It appears that a corp could avoid that result if it could successfully convert to tax-exempt status before the IRS issues final regulations on this, but: 1) we don't know how soon that might be, and 2) the stakes are high enough that your should review this carefully with your lawyers before you do anything. January 1999: final regs are out, don't change anything without carefully reviewing this with your attorney. (I tried to warn you!)

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