The exclusions for interest, annuities, royalties, and rents,
explained earlier in this chapter under Income, may not
apply to a payment of these items received by a controlling
organization from its controlled organization. The payment is included
in the controlling organization's unrelated business taxable income to
the extent it reduced the net unrelated income (or increased the net
unrelated loss) of the controlled organization. All deductions of the
controlling organization directly connected with the amount included
in its unrelated business taxable income are allowed.
For a payment made under a contract in effect on June 8, 1997, and
received during the first 2 tax years beginning after August 4, 1997,
the definition of a controlled organization and the computation of the
amount included in the controlling organization's unrelated business
taxable income are different. See section 1.512(b)-1(l) of the
regulations for details.
Net unrelated income.
- For an exempt organization, its unrelated business taxable
- For a nonexempt organization, the part of its taxable income
that would be unrelated business taxable income if it were exempt and
had the same exempt purposes as the controlling organization.
Net unrelated loss.
- For an exempt organization, its net operating loss,
- For a nonexempt organization, the part of its net operating
loss that would be its net operating loss if it were exempt and had
the same exempt purposes as the controlling organization.
An organization is controlled if:
- For a corporation, the controlling organization owns (by
vote or value) more than 50% of the stock,
- For a partnership, the controlling organization owns more
than 50% of the profits or capital interests, or
- For any other organization, the controlling organization
owns more than 50% of the beneficial interest.
For this purpose, constructive ownership of stock (determined
under section 318) or other interests is taken into account.
Therefore, an exempt parent organization is treated as controlling
any subsidiary in which it holds more than 50% of the voting power or
value, whether directly (as in the case of a first-tier subsidiary) or
indirectly (as in the case of a second-tier subsidiary).
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