§ 53.4968-3 Related organizations. ( a ) *Definition of related organization* — ( 1 ) *In general.* For purposes of section 4968(d) of the Internal Revenue Code (Code) and §§ 53.4968-1 through 53.4968-4, except as provided in paragraph (a)(2) of this section, the term *related organization* means, with respect to an educational institution, any organization that— ( i ) Controls such institution;
( ii ) Is controlled by such institution;
( iii ) Is controlled by one or more persons that also control such institution;
( iv ) Is a supported organization (as defined in section 509(f)(3) of the Code) with respect to such institution during the taxable year; or
( v ) Is a supporting organization (as described in section 509(a)(3)) with respect to such institution during the taxable year.
( 2 ) *Organizations not considered related organizations.* For purposes of section 4968(d) and §§ 53.4968-1 through 53.4968-4, the term *related organization* does not include any organization that is— ( i ) A taxable corporation;
( ii ) A taxable trust, including a non-grantor charitable lead trust (except to the extent the trust is controlled by the educational institution as described in paragraph (b)(2)(ii) of this section);
( iii ) A grantor charitable lead trust;
( iv ) A charitable remainder trust;
( v ) A partnership, S corporation (as defined in section 1361(a)(1) of the Code), or other pass-through entity that is generally not subject to Federal income tax, the income of which is taxable to its partners or other interest holders; or
( vi ) A decedent's estate.
( 3 ) *Employee benefit plans or arrangements.* A trust or similar funding vehicle of an employee benefit plan or arrangement, such as a section 501(a) trust funding a section 401(a) qualified retirement plan, or an annuity contract funding a section 403(b) plan, or a section 419(e) welfare benefit fund (including a voluntary employees' beneficiary association under section 501(c)(9)) funding a welfare benefit plan, will not be treated as a related organization and its assets will not be treated as the assets of the educational institution or of a related organization. A trust or other funding vehicle of an unfunded employee benefit plan of an educational institution or a related organization, such as a grantor trust described in section 671 *et seq.,* used in connection with a section 457(b) plan or an arrangement subject to section 457(f), will be treated as a related organization for purposes of section 4968(d) and its assets will be treated as the assets of the educational institution or of a related organization, but the assets are not considered “used directly in carrying out the institution's exempt purpose” for purposes of section 4968(b)(1)(D). For purposes of determining whether the employee benefit plan of an educational institution is funded or unfunded, the educational institution and all of its related organizations are treated as a single sponsor and payor of the benefits.
( b ) *Control* — ( 1 ) *Controls such institution.* For purposes of section 4968(d) and §§ 53.4968-1 through 53.4968-4, an organization controls an educational institution if— ( i ) The organization owns (by vote or value) more than 50 percent of the voting and non-voting stock or membership interest of the educational institution; or
( ii ) The organization (or one or more of its managers, directors, officers, trustees, or employees, acting only in those capacities) can— ( A ) Appoint or elect (which must include the power to remove and replace) more than 50 percent of the members of the educational institution's governing body (such as directors, officers, or trustees), or otherwise has the ongoing power to appoint or elect more than 50 percent of such members with reasonable frequency;
( B ) Require the educational institution to make an expenditure (or prevent the educational institution from making an expenditure); or
( C ) Require the educational institution to perform any act that significantly affects its operations (or prevent it from performing such an act).
( 2 ) *Is controlled by such institution.* For purposes of section 4968(d) and §§ 53.4968-1 through 53.4968-4, an organization is controlled by an educational institution: ( i ) *Tax-exempt corporation.* In the case of a corporation recognized as exempt from income tax under section 501(a), if the educational institution owns (by vote or value) more than 50 percent of the voting and nonvoting stock or membership interest of the corporation.
( ii ) *Trust* — ( A ) *In general.* In the case of a trust— ( 1 ) If the educational institution is substantially the sole permissible trust beneficiary or appointee of both income and principal, whether or not the timing of the distribution is subject to the trustee's discretion;
( 2 ) If the trust is a pooled income fund described in sections 642(c)(3) and 642(c)(5);
( 3 ) If, but only to the extent that, the assets of the trust were contributed to the trust by the educational institution (or by a person controlled by the educational institution); or
( 4 ) If, but only to the extent that, the educational institution (or person controlled by the educational institution) has the right to demand (or can otherwise cause) a distribution of principal from the trust to the educational institution (or a person controlled by the educational institution).
( B ) *Person controlled by the educational organization.* For purposes of this paragraph (b)(2)(ii), a person is controlled by an educational institution if the educational institution has the power to remove and replace such person or otherwise controls the person under one of the tests described in § 53.4968-3(b)(2)(i), (ii), or (iii), with similar principles applying for purposes of determining control of any other form of entity.
( iii ) *Nonstock organization.* In the case of a nonstock organization, if the educational institution (or one or more of its managers, directors, officers, trustees, or employees, acting only in those capacities) can— ( A ) Appoint or elect (which must include the power to remove and replace) more than 50 percent of the members of the organization's governing body (such as directors, officers, or trustees), or otherwise has an ongoing power to appoint or elect more than 50 percent of such members with reasonable frequency);
( B ) Require the organization to make an expenditure (or prevent the organization from making an expenditure); or
( C ) Require the organization to perform any act that significantly affects its operations (or prevent it from performing such an act).
( 3 ) *Is controlled by one or more persons that also control such institution.* For purposes of section 4968(d) and this section, an organization (other than one described in paragraph (a)(2) of this section) is controlled by one or more persons that also control the educational institution if more than 50 percent of the members of the governing body of the other organization are directly or indirectly controlled by persons that comprise more than 50 percent of the members of the governing body of the educational institution.
( 4 ) *Constructive ownership.* The principles of section 318(a)(2) (relating to ownership attribution from partnerships, estates, trusts, and corporations) apply for purposes of determining ownership of stock in a corporation, and similar principles apply for purposes of determining ownership of an interest in any other entity.
( 5 ) *Method of control.* Control includes control by aggregating votes or positions of authority (including by veto power), but applies regardless of the method by which the control is exercised or exercisable.
( c ) *Organization described in section 509(a)(3) during the taxable year with respect to the educational institution.* A section 509(a)(3) organization is a supporting organization with respect to an educational institution only if the supporting organization meets the organizational, operational, and relationship tests of section 509(a)(3)(B) and § 1.509(a)-4 of this chapter with respect to the educational institution.
( d ) *Assets and net investment income of related organizations* — ( 1 ) *In general.* A related organization's assets and net investment income are taken into account both in determining whether an institution is an applicable educational institution and in computing the net investment income of an applicable educational institution. For purposes of determining the aggregate fair market value of the assets and net investment income of an educational institution, the assets and net investment income of all related organizations are treated as the assets and net investment income, respectively, of the institution, unless an exception provided in paragraph (d)(2) of this section or the exception provided in § 53.4968-1(b)(5)(iv) (relating to assets used directly in carrying out an exempt purpose) applies. In cases in which an organization is a related organization with respect to an educational institution under more than one definition of this § 53.4968-3, then the rule that attributes the largest amount of assets and net investment income of the related organization to the educational institution must be applied.
( 2 ) *Exceptions.* For purposes of section 4968 and this paragraph (d)(2)— ( i ) *No amount is taken into account with respect to more than one educational institution.* In determining the aggregate fair market value of the assets and net investment income of an educational institution, assets and net investment income of a related organization are not taken into account with respect to more than one educational institution. Thus, in any case in which an organization is a related organization with respect to more than one educational institution, the assets and net investment income of the related organization must be allocated between or among the educational institutions as to which the organization is a related organization, subject to paragraph (d)(2)(ii) of this section. The educational institution must make such allocation in a reasonable manner, taking into account all facts and circumstances, that is consistent across all related organizations.
( ii ) *Assets and net investment income that are not intended or available for the use or benefit of the educational institution* — ( A ) *In general.* Unless a related organization is controlled by the educational institution or is a supporting organization described in section 509(a)(3) with respect to such institution for the taxable year, assets and net investment income of a related organization that are not intended or available for the use or benefit of the educational institution are not taken into account by that educational institution.
( B ) *Determining whether assets and net investment income of a related organization are intended or available for the use or benefit of an educational institution.* If a related organization controls the educational institution, is controlled by one or more persons that also control such institution (but is not described in section 509(a)(3) with respect to the educational institution for the taxable year), or is a supported organization (as defined in section 509(f)(3)) during the taxable year with respect to the educational institution, then the related organization's assets and net investment income are taken into account as assets and net investment income of the educational institution only to the extent the assets and net investment income are intended or available for the use or benefit of that educational institution. Assets and net investment income of a related organization are intended or available for the use or benefit of an educational institution if such assets and net investment income are specifically earmarked or restricted for the benefit of, or otherwise are fairly attributable to, the educational institution. For example, assets are fairly attributable to the educational institution if they have been affirmatively designated or appropriated for the educational institution or made available for the educational institution to draw upon at will. Conversely, assets and net investment income of a related organization are not intended or available for the use or benefit of an educational institution if such assets and net investment income are specifically earmarked or restricted for another entity or for unrelated purposes or otherwise are not fairly attributable to the educational institution. The assets and net investment income of a related organization must be allocated between those intended or available for the use or benefit of an educational institution and those not intended or not available for the use or benefit of that same educational institution. The educational institution must make such allocation in a reasonable manner, taking into account all facts and circumstances, that is consistent across all related organizations.
( C ) *Related organizations that are controlled by the educational institution or that are supporting organizations (as described in section 509(a)(3)) with respect to the educational institution during the taxable year* — ( 1 ) *In general.* If a related organization is controlled, as defined in paragraph (b)(2) of this section, by an educational institution, or is a supporting organization with respect to the educational institution during the taxable year, as defined in paragraph (c) of this section, the assets and net investment income of the related organization are taken into account as assets and net investment income of the educational institution regardless of whether those assets and net investment income are earmarked or restricted for the benefit of, or otherwise are fairly attributable to, the educational institution and even if they are specifically earmarked or restricted for another entity or for unrelated purposes or otherwise are not fairly attributable to the educational institution, subject to paragraph (d)(2)(ii)(C)( 2 ) of this section. However, see §§ 53.4968-1(b)(2)(ii)(A)( 3 ) and ( 4 ) regarding trusts that are controlled related organizations only to the extent assets of the trust were contributed to the trust by the educational institution (or by a person controlled by the educational institution), or only to the extent the educational institution (or person controlled by the educational institution) has the right to demand (or can otherwise cause) a distribution of principal from the trust to the educational institution (or a person controlled by the educational institution). *See also* § 53.4968-1(b)(5)(iv) for rules relating to when assets of a related organization are deemed to be used directly in carrying out the institution's exempt purpose.
( 2 ) *Special rule for Type III supporting organizations with respect to an educational institution as of December 31, 2017.* An educational institution with a related organization that was a Type III supporting organization with respect to the educational institution on December 31, 2017, takes into account only the assets and net investment income of such Type III supporting organization that are intended or available for the use or benefit of, or otherwise are fairly attributable to, the educational institution, as described in paragraph (d)(2)(ii)(B) of this section. An educational institution may determine whether the assets and net investment income of such a Type III supporting organization are intended or available for the use or benefit of, or otherwise are fairly attributable to, the educational institution using any reasonable method. A method that attributes to an educational institution assets and net investment income of a supporting organization that specifically are earmarked for the educational institution, are restricted for the benefit of the educational institution, or otherwise are fairly attributable to the educational institution (such as those that have been affirmatively designated or appropriated for the educational institution or made available for the educational institution to draw upon at will) will be deemed to be reasonable.
( 3 ) *Determining assets of related organizations.* To determine which assets of a related organization are included by an educational institution under section 4968(b)(1)(D) for a particular year, an educational institution determines which organizations are related organizations, as defined in section 4968(d)(2) and § 53.4968-3, as of the end of the educational institution's preceding taxable year, and values the relevant assets on that date.
( 4 ) *Determining net investment income of related organizations.* To determine the amount of net investment income of a related organization that is included by the applicable educational institution in calculating the tax imposed by section 4968(a) for a particular taxable year, an applicable educational institution determines which organizations are related organizations, as defined in section 4968(d)(2) and § 53.4968-3, as of the end of that taxable year of the applicable educational institution and includes the net investment income from each related organization's taxable year that ends with or within that same taxable year of the applicable educational institution. If an organization became a related organization after the beginning of the applicable educational institution's taxable year, then the applicable educational institution includes the organization's net investment income for the portion of the year that the organization was a related organization, using any reasonable method.
[T.D 9917, 85 FR 65557, Oct. 15, 2020]