educational institution are generally treated as assets and net investment income of the institution. The term related organization means an organization that (1) controls the institution, (2) is controlled by the institution, (3) is controlled by one or more persons that also control the institution, (4) is a supported organization with respect to the institution, or (5) is a supporting organization with respect to the institution.108.12
The term related organization does not include a grantor charitable lead trust, a charitable remainder trust, or a decedent's estate.108.13 The Treasury and the IRS recognized that some types of entities that might be related organizations may be taxed, then provide after‐tax funds to an educational institution; taxation of these distributions again pursuant to this excise tax would lead to double taxation. Thus, the final regulations also exclude from the definition of related organization taxable corporations and certain taxable trusts.108.14 Further so excluded are partnerships, S corporations, and other pass‐through entities a portion of the income of which flows through to an educational institution.108.15
Although the first three of these categories require control, the statute does not define the term. The proposed regulations utilized the concept of control used in the controlled subsidiary context.108.16 That approach did not survive the comment process. The final regulations provide separate rules for the different relationships that may exist and separately define control for purposes of the three control relationships.108.17
An organization controls an educational institution if (1) the organization owns (by vote or value) more than 50 percent of the voting and nonvoting stock or membership interest of the institution or (2) the organization (or one or more of its managers) can (a) appoint or elect more than 50 percent of the members of the institution's governing body or otherwise has the ongoing power to appoint or elect more than 50 percent of the members with reasonable frequency, (b) require the institution to make an expenditure or prevent the institution from making an expenditure, or (c) require the institution to perform any act that significantly affects its operations or prevent it from performing an act.108.18
A tax‐exempt corporation is controlled by an educational organization if the institution owns (by vote or value) more than 50 percent of the voting and nonvoting stock or membership interest of the corporation.108.19
An organization (other than an entity that is not a related one) 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 institution.108.20
As to the circumstances where a trust is deemed to have a relationship with an educational institution comparable to the concept of control, the final regulations were substantially revised. They provide that a trust is a related organization and there is deemed control only (1) if the educational institution is substantially the sole permissible trust beneficiary or appointee of both income and principal, (2) if the trust is a pooled income fund, (3) to the extent the assets of the trust were contributed to the trust by the institution or a controlled entity, or (4) to the extent the institution or a controlled entity has the right to demand or otherwise cause distribution of principal from the trust to the institution or controlled entity.108.21
The rule as to control of nonstock organizations in the proposed regulations was revised. Pursuant to the final regulations, an educational institution controls a nonstock organization if the institution (or one or more of its managers) can (1) appoint or elect more than 50 percent of the members of the organization's governing body or otherwise can appoint or elect that majority with reasonable frequency, (2) require the organization to make an expenditure or prevent it from making an expenditure, or (3) require the organization to perform any act that significantly affects its operations or prevent it from performing such an act.108.22 Employee benefit funds are not related organizations for these purposes.108.23
A related organization's assets and net investment income are generally taken into account, for purposes of calculation of the excise tax, in determining whether an institution is an applicable educational institution and in computing the net investment income of an educational institution. If an organization is a related organization with respect to an institution under more than one of these definitions, the rule that attributes the largest amount of assets and net investment income to the institution must be applied.108.24
There are three exceptions to this attribution rule, one being the above‐referenced rule that assets that are used directly in carrying out the institution's exempt purpose are not part of the excise tax base. In determining the attributions, assets and net investment income of a related organization are not taken into account with respect to more than one educational institution; there is to be an allocation between or among the institutions.108.25 Unless a related organization is controlled by the educational institution or is a supporting organization with respect to the institution, assets and net investment income of a related organization that are not intended or available for the use or benefit of the institution are not taken into account by the institution.108.26
Notes
1 96.1 National Philanthropic Trust, 13th Annual Report on Donor‐Advised Funds (Nov. 12, 2019).
2 96.2 In general, Hopkins, Donor‐Advised Funds: Law and Policy (Pittsburgh, PA: Dorrance Pub. Co., 2020).
3 105.1 IRC § 4968(b)(2).
4 108.1 T.D. 9917 (Sep. 18, 2020).
5 108.2 Reg. § 53.4968‐1(b)(2).
6 108.3 Id.
7 108.4 Reg. § 53.4968‐1(b)(3).
8 108.5 Reg. § 53.4968‐1(b)(4).
9 108.6 Reg. § 53.4968‐1(b)(5).
