Part VI. Interest, Annuities, Royalties, and Rents From Controlled Organizations

Under section 512(b)(13), interest, annuities, royalties, and rents received or accrued (directly or indirectly) by a controlling organization from a controlled organization are subject to tax, whether or not the activity conducted by the controlling organization to earn these amounts is a trade or business or is regularly conducted. However, see Regulations section 1.512(b)-1(l)(5) regarding amounts taxable under other provisions of the Code.

Controlled organization. An entity is a “controlled organization” if the controlling organization owns:

• By vote or value, more than 50% of a corporation’s stock (for an organization that is a corporation);

• More than 50% of a partnership’s profits or capital interests (for an organization that is a partnership); or

• More than 50% of the beneficial interests in an organization (for an organization other than a corporation or partnership).

To determine the ownership of stock in a corporation, apply the principles of section 318 (constructive ownership of stock). Apply similar principles to determine the ownership of interests in a partnership or any other organization.

Column 3. Enter the net unrelated income (or net unrelated loss) of each controlled entity listed that is exempt from tax under section 501(a).

Column 7. Enter the taxable income of each nonexempt controlled organization.

Column 8. Enter the net unrelated income (or net unrelated loss) of each controlled entity listed that isn’t exempt from tax under section 501(a). Net unrelated income is that portion of the controlled entity’s taxable income that would be UBTI if the entity were exempt under section 501(a) and had the same exempt purposes as the controlling organization. Net unrelated loss is the controlled organization’s NOL adjusted under rules similar to those used to determine net unrelated income.

Column 4 or 9. For each controlled organization, enter the total of specified payments received from each controlled organization. If the organization received both specified payments and qualifying specified payments from a controlled organization, enter specified payments

on one line and qualifying specified payments on another so that there are dual entries for that controlled organization.

Column 5 or 10. For specified payments, enter the portion of column 4 or 9 to the extent that the payment reduced the net unrelated income (or increased the net unrelated loss) of the controlled entity.

Column 6 or 11. Enter only those deductions directly connected with the income entered in column 5 or 10.

With respect to qualifying specified payments, enter only that portion of expenses directly connected to the amounts included in column 5 or 10, that is, the excess of the payment over the FMV amount, as determined in accordance with section 482. Don’t enter any expenses relating to the portion of such payment that isn’t includible in income under this special rule.

Caution: For valuation misstatements regarding qualifying specified payments, there is a 20% addition to tax. See section 512(b)(13)(E)(ii).

Excess qualifying specified payments. Excess qualifying specified payments received or accrued from a controlled entity (that is, the amount of qualifying specified payments in excess of what would have been paid or accrued if the payments had been determined under section 482) are included in a controlling exempt organization’s UBTI.