Office of Chief Counsel Internal Revenue Service M emorandum Number: 202430007 Release Date: 7/26/2024 CC:EEE:EB:HW PRESP - 109138-23
UILC: 52.00-00, 414.03-00
date : June 17, 2024
to : Jeremy Fetter Deputy Managing Counsel (Dallas/Farmers Bra nch) Area Counsel (CC:TEGEDC:GCDAL)
from : Laur a Warshawsky Deputy Associate Chief Counsel (Employee Benefits) (CC:EEE:EB)
Lynne Camillo Deputy Associate Chief Counsel (Exempt Organizations and Employment Taxes) ( CC:EEE:EOET)
subject : Application of the Controlled Group Rules under Section 52 t o Tax - Exempt Organizations in Determining E ligibility for and the A mount of the Employee Retention Credit
This Chief Counsel Advice responds to your request for assistance. This advice may not be used or cited as precedent. ISSUE How do the controlled group rules under section 52 of the Internal Revenue Code (Code) apply to organizations described in section 501(c) and exempt from tax under section 501(a) (tax-exempt organizations) when determining the a pplication of the
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Employee Retention Credit (ERC) under the circumstances described in this memorandum ?
CONCLUSION A t ax-exempt organization must apply a reasonable, good faith interpretation of the controlled group rules under section 52 in determining its eligibility for and the amount of the ERC , an d that reasonable, good faith interpretation must be applied consistent ly for all purposes of the Code . The application of Treasury Regulation § 1.414(c) - 5 (b) (with certain modifications, as discussed below) by a tax-exempt organization is treated as a rea sonable, good faith interpretation of the controlled group rules under section 52 in determining eligibility for and the amount of the ERC. FACTS Employer X is a n organization exempt from tax under section 501(c)(3) of the Code . National Organization is managed by a Board of Directors. ( M embers of a Board of Directors are referred to as “ D irectors ” herein .) Employer X is a n affiliate of National Organization and is a subordinate organization in a group exem ption letter held by National Organization. Howev er, Employer X asserts that it operates as an i ndependent tax-exempt organization, has its own EIN, and is managed by a Board of Directors . , None of the D irectors of National Organization is a D irector of Em ployer X . National Organization does not have the power to appoint any D irectors of Employer X . National Organization also does not have the general power to remove a ny D irector of Employer X or to designate a new D irector of Employer X . In addition, no D i rector of Employer X is an agent or employee of N ational Organization . Further , Employer X does not have a
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general power to appoint or remove any D irector of National Organization or to designate a new D irector of National Organization and no D irector of N ational Organization is an agent or employee of E mploye r X . Employer X functions under the direction of a chief executive officer (CEO) who is selected by and reports to Employer X ’s Board of Directors. The D irectors have the ability under Employer X ’s b ylaws to appoint or remove any D irector of Employ er X and to designate a new D irector . Employer X asserts that it is not aggregated with National Organization under section 52 in determining its eligibility for and the amount of the ERC. Employer X has c laimed the ERC for the third calendar quarter of 2020. Alternatively, assume that all facts remain the same as above except that National Organization has the general power to appoint and to remove or designate three of the five D irectors ( 60 percent) of Employer X . LAW AND ANALYSIS The ERC is a cred it against applicable employment taxes for an eligible employer, including a tax-exempt organization, that pays qualified wages (including certain health plan expenses) to some or all of its emplo yees after March 12, 2020, and before January 1, 2021. 1 For calendar quarters in 2020, 2 an eligible employer is any
1 As provided in section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub . L. No. 116-136, 134 Stat. 281 (Mar. 27, 2020), as amended by section 206 of the Taxpayer Certainty and Disaster Tax Relief Act (Relief Act), which was e nacted as Division EE of the Consolidated Appropriations Act, 2021, Pub. L. No. 116-260, 134 Stat. 118 2 (De c. 27, 2020). 2 Section 207 of the Relief A ct, effective for calendar quarters beginning after December 31, 2020, amended section 2301 of the CARES Act to extend the application of the ERC to qualified wages paid after December 31, 2020, and before J uly 1, 2021, and to modify the calculation of the credit amount for qualified wages paid during that time. Section 9651 of the American Rescue Plan Act of 2021 (ARP), Pub. L. No. 117-2, 135 Stat. 4, enacted section 3134 of the Code, effective for calendar quarters
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employer carrying on a trade or business 3 for which (1) the operation of the employer’s trade or business is fully or partially suspended due to orders from an appropriate governmental authority limit ing commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the Coronavirus Disease 2019 (COVID - 19), or (2) the employer had a significant decline in g ross receipts. 4 In the case of a tax - exempt organization, the r equirements relating to carrying on a trade or business and relating to a full or partial suspension of the operation of a trade or business due to a governmental order apply to all operations of the organiz ation. In addition, in the case of a tax-exempt o rganization, any reference to gross receipts is treated as a reference to gross receipts within the meaning of section 6033 of the Code. For calendar quarters in 2020, the credit equals 50 p ercent of quali fied wages with respect to each employee for each applicable quarter, subject to a limit of $10,000 of qualified wages per employee for all calendar quarters. 5 For large eligible employers in 2020, qualified wages are those wages paid by th e large eligible employer with respect to which an employee is no t providing services during a period in which the operation of a trade or business is fully or partially suspended due to a governmental
beginning after June 30, 2021, and provi des an ERC for wages paid after June 30, 2021, and before January 1, 2022. Section 80604 of the Infrastru cture Investment and Jobs Act (Infrastructure Act), Pub. L. 117-58, 135 Stat. 429 (2021), amended sect ion 3134(n) of the Code to provide that the ERC u nder section 3134 shall apply only to wages paid after June 30, 2021, and before October 1, 2021 (or, in the case of wages paid by an eligible employer which is a recovery startup business, January 1, 2022). 3 For purposes of the ERC, a tax-exempt organiza tion described in section 501(c) of the Code that is exempt from tax under section 501(a) of the Code is deemed to be engaged in a “trade or business” with respect to all operations of the organization. See Notice 2021-20, 2021-11 I RB 922, Q/A - 1. 4 For cal endar quarters in 2020, the period during which an employer experienced a significant decline in gross re ceipts begins with the first calendar quarter for which gross receipts are less than 50 percent of gro ss receipts for the same calendar quarter in 2019 . See section 2301(c)(2)(B)(i) of the CARES Act, as amended by section 206 of the Relief Act. 5 See section 2301(a) and (b)(1) of the CARES Act, as amended by section 206 of the Relief Act.
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order or in which the employer had a significant decli ne in gross rece ipts. 6 For small eligible employers in 2020, qual ified wages are those wages paid by the small eligible employer with respect to an employee during a period in which the operation of a trade or business is fully or partially suspended due to a governmental order or in which the employer had a significant decline in gross receipts. All organizations that are members of a controlled group of corporations or trades or businesses under section 52(a) or (b) of the Code, members of an affiliate d service group u nder section 414(m), or employers that are aggreg ated under section 414(o) are treated as a single employer in determining their eligibility for and the amount of the ERC. 7
Employers required to be aggregated are treated as a single employer for the foll owing rules applicable to the ERC, including but not limited to: 8
(1) determining whether the employer has a trade or business operation that was fully or partially suspended due to orders related to COVID - 19 from an appropria te governmental authority; (2) determining whether the employer experiences a significant decline in gross receipts;
6 For calendar qu arters in 2020, a large employer is an employer t hat averaged more than 100 full-time employees in 2019. See section 2301(c)(3)(A)(i) of the CARES A ct, as amended by section 206 of the Relief Act. 7 See section 2301(d) of the CARES Act and section 3134(d) of the Code. Although the facts of this Chief Co unsel Advice relate to an ERC claimed in the third calendar quarter of 2020, the analysis of the aggregation rules applies to all calendar quarters in whi ch the ERC under section 2301 of the CARES Act and/or section 3134 of the Code can be claimed. The Rel ief Act, ARP, and Infrastructure Act did not modify the application of the aggregation rules for purposes of the ERC after the enactment of the CARES Act. 8 In the third and fourth calendar quarters of 2021, the aggregation rules also apply in determining whether an employer is a recovery startup business and to the $50,000 aggregate limitation on the credit for a recovery startup business.
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(3) determining whether the employer is a large employer; and (4) determining the maximum credit amount per employee. Section 52(a) and (b) and section 414(b) a nd (c) provide controlled group rules for parent-subsidiary groups, brother-sister groups, and combined groups. Sections 52(a) and 414(b) generally provide that corporations that are members of a controlled group of corporation s are treated as a single emp loyer. Sections 52(b) and 414(c) generally provid e that trades or businesses that are partnerships, trusts, estates, corporations, or sole proprietorships under common control are members of a controlled group and are treated a s a single employer. Sections 52(b) and 414(c) provide the same definitions fo r parent-subsidiary groups, brother-sister groups, and combined groups, except that for a parent-subsidiary group under section 52, “controlling interest” means more than 50 perc ent ownership, and under sect ion 414, “controlling interest” means at least 80 percent ownership. 9
While section 52 of the Code applies to tax-exempt organizations for purposes of determining the ERC , t he Treasury Regulations under section 52 do not address the application of the co ntrolled group rules to tax-exempt organizations. 10 However, Treasury Regulations under section 414 , which set forth controlled group rules that are
9 Compare Treas. Reg. § 1.52-1(c)(2) with § 1.414(c) - 2(b)(2) (providi ng different ownership thresholds for the definit ion of controlling interest). 10 Section 52 of the Code was enacted to provide the controlled group rules applicable to section 51, relating to the work op portunity tax credit (WOTC). In general, a tax-exempt organization cannot claim the WOTC; therefore, t he regulations under section 52 do not address tax-exempt organizations. But see sections 52(c)(2) and 3111(e) for the credit for qualified tax-exempt org anizations employing certain veterans.
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substantially the same as the rules under section 52, provide rules applic able to certain tax-exempt organiz ations. 11
Treasury Regulation § 1.414(c) - 5 provi des rules regarding the aggregation of certain tax-exempt organizations under section 414(c). Section 1.414(c) - 5(b) provides that common control generally exists between a tax-exempt organization and another organization if at least 80 percent of the d irec tors or trustees of one organization are either representatives of, or directly or indirectly controlled by, the other organization. A trustee or director is treated as a representative of another exempt org anization if they are also a trustee, director, a gent, or employee of the other exempt org anization. A trustee or director is controlled by another organization if the other organization has the general power to remove the trustee or director and designate a new trustee or director. Whether a person has the power to remove or designate a truste e or director is based on facts and circumstances. Because Treasury Regulations have not been issued regarding the application of section 52 to tax-exempt organizat ions, a tax-exempt organization must apply a reas onable, good faith interpretation of the controlled group rules in determining its eligibility for and the amount of the ERC. The application of Treasury Regulation § 1.414(c) - 5(b) ( modified by substituting “more than 50 percent” in place of “at least 80 p ercent” each place it appears in § 1.414( c) - 5(b)) by a tax-exempt organization w ould be treated as a reasonable, good faith interpretation of the controlled group rules in
11 See Treas. R eg. § 1.414(c) - 5(a).
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determining eligibility for and the amount of the ERC, 12 provided that the tax-exempt organization applies the controlled gro up rules on a consistent basis for all purposes under the Code. Guidance also has not been issued regarding the application of section 52 to churches or qualified ch urch-controlled organizations. 13 Therefore, a chur ch, or qualified church-controlled orga nization must apply a reasonable, good faith interpretation of the controlled group rules under section 52 in determining eligibility for and the amount of the ERC for churches or qualified church-controlled organizat ions ( taking into account the reason th e controlled group rules were included in the ERC ). Although Treasury Regulation § 1.414(c) - 5 generally does not apply to churches (as defined in section 3121(w)(3)(A )) and qualified church-controlled organizations (as defined in section 3121(w)(3)(B)) , 14 the application of the controlled group rules provided in § 1.414(c) - 5(b) (but substituting “more than 50 percent” in place of “at least 80 percent” each place it appe ars in § 1.414(c) - 5(b)) by a church or qualifie d church - controlled organization would be treated as a reasonable, good faith interpretation of the controlled group rules in determining eligibility for and the amount of the ERC .
The failure of a tax-exemp t organization , including a church or a qualifi ed church -
12 This is consistent with t he approach set forth in the preamble to Treasury Regulations regarding section 9010 of the Patient Protection and Affordable Care Act, Pub. L. 111-148, 1 24 Stat. 119 (2010), and the No Surprises Act, Pub. L . 116-260, Div. B, tit. I, 134 Stat. 1182 (2020). See T.D. 9643, 78 FR 71476, 71481 (Nov. 29, 2013) (i n the preamble, in the Explanations of Provisions and Summary of Comments section , under the heading Controlled Groups ) ; T.D. 9951, 86 FR 36872, 36896 (Ju ly 13, 2021) (in the preamble, in the Overview of the Interim Final Rules — Departments of HHS, Labor, and the Treasury section, under the heading Eligible Databases ) . 13 Section 336 of the Protecting Americans from Tax Hikes Act of 2015, Pub. L. 114-113, 129 Stat. 2242 amended section 414(c) (2) to provide special rules for church plans for purposes of determining controlled groups, automatic enrollment arrangements, certain plan transfer s and mergers, and investments in collective trusts. However, these rules are not applicable for purposes of determining c ontrolled group status under section 52. 14 See Treas. Reg. § 1.414(c) - 5(a) .
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controlled organization , to apply a reasonable, good faith interpretation of the controlled group rules under section 52 in determining eligibility for and the amount of the ERC may result in the den ial of the credit and the imposition of applica bl e penalties . DISCUSSION No D irector of either Employer X or National Organization is a representative ( that is , a director, agent, or employee) of the other organization . In addition, neither organization is controlled by the other because neither organi zation has the general power to appoint a D irector of the other organization or the general power to remove a D irector and designate a new D irector. Because Employer X and National Organization are not membe rs of a controlled group under sect ion 52 , Employ er X is not required to be aggregated with National Organization to determine the amount of the ERC for which Employer X is eligible . Employer X ’s application of the controlled group rules under section 52 i n determining its eligibility for and the amount of the ERC is a reasonable, good faith interpretation provided that Employer X applies the controlled group rules on a consistent basis for all purposes under the Code. In applying the alternative facts , E mployer X 's assertion that Employe r X and Nationa l Organization are not members of a controlled group under section 52 is not a reasonable , good faith interpretation because National Organization has the general power to appoint and to remove or designate more than 50 percent (that is, 60 percent) of th e Board of Directors of Employer X . Employer X and National Organization are members of a controlled group under section 52, and Employer X is required to be aggregated with National Organization to determin e its eligibility for and the amou nt of the ERC.
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Please contact the EEE Health and Welfare Branch at (202) 317-5500 if you have any further questions.