Title Holding Corporations

Veterans’ organizations exempt under IRC 501(c)(19), 501(c)(4), 501(c)(7), 501(c)(8) and 501(c)(10) may form separate title holding organizations, recognized as exempt under IRC 501(c)(2), to hold title to their facilities. This may be necessary in states where non-incorporated entities cannot hold title to real property. It may also be a useful device to limit liability, facilitate administration and increase borrowing power. This chapter discusses exemption requirements and activities of title holding corporations.

An IRC 501(c)(2) organization must be organized for the exclusive purpose of holding title to property, collecting income from that property and turning that income over to the exempt organization that controls it. This type of organization should not engage in any unrelated trade or business. Certain UBIT exceptions exist for debt-financed income, interest, annuities, royalties and/or rents.

Does a title-holding corporation have to incorporate under state law?

No. The term “corporation” as used in IRC 501(c)(2) includes associations and business or commercial trusts. The purpose for creating the organization will often dictate the organizational form chosen.

May a corporation whose purposes are identical to the veterans’ organization it supports, but whose only activity is holding title to the post, lodge or clubhouse, collecting rent from the supported organization, and using the rent to pay for the upkeep of the facility qualify for exemption under IRC 501(c)(2)?

Yes.

May a title-holding organization operate “video poker machines” or other forms of gambling for members of the veterans’ organization that forms it?

No. The operation of casino nights, video poker machines or other forms of gambling are considered recreational activities and are outside the scope of IRC 501(c)(2).

May an IRC 501(c)(2) organization receive an incidental amount of its income from the operation of vending machines, such as a soft drink machine, located on its property without jeopardizing its exemption?

Yes. A small amount of income generated from an unrelated trade or business, such as the operation of a vending machine, will not cause an IRC 501(c)(2) organization to lose its exemption. To be considered incidental, the amount of income generated by all unrelated activities must not exceed 10 percent of the organization’s gross receipts. Income generated from any unrelated trade or business is subject to tax under IRC 511.

May a title-holding organization lease “video poker machines” or other gambling devices to the veterans’ organization that forms it?

Video poker machines and other gaming devices are personal property. If an IRC 501(c)(2) organization’s income from the rental of such personal property, when added to the receipts from any other unrelated business activities, exceeds 10 percent of gross receipts, it will not qualify for exemption.

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May a title-holding corporation operate a bar and restaurant for the members of a veterans’ organization in its facility?

No. The operation of a bar and restaurant, as well as other social and recreational uses, is outside the scope of IRC 501(c)(2).

Will income from the rental of personal property, such as chairs and tables, adversely affect exemption or result in UBIT?

The rental of personal property is considered the conduct of a trade or business and may jeopardize exemption under IRC 501(c)(2) if, along with other unrelated receipts, the income generated exceeds 10 percent of gross receipts. There is an exception, however, for personal property that is leased with real property. The rental of personal property as part of a mixed lease will not affect exemption but may result in some or all the income generated from the lease being taxed under IRC 511. The receipt of rent from personal property in a mixed lease has the following UBIT consequences:

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