Can the individual members of a religious or apostolic organization exempt under IRC section 501(d) claim a pass-through share of the organization's New York investment tax credits and other tax incentives?

Plain-English summary

Church Communities Inc. is a religious or apostolic organization recognized as tax-exempt under section 501(d) of the Internal Revenue Code. Its members take lifetime vows of poverty and obedience, live communally, own no private property, and receive no salary; instead, income the members earn from the group's manufacturing businesses (wood furniture, toys, and mobility equipment) is pooled into a common treasury and distributed to members based on need. Petitioner planned to expand its manufacturing operations into New York and asked how to allocate investment tax credits and other economic-based tax incentives among its members.

Because a section 501(d) organization must compute its income the way a corporation does but report it on federal Form 1065 (the partnership information return), and each member must then include a pro rata share of that income as a dividend on the member's own federal return, Petitioner wanted to know whether New York would treat it as a partnership - which would let tax credits and other incentive items pass through directly to members the way partnership items normally do.

The Department said no. Relying on Tax Law § 607(a), which requires New York income tax terms to carry the same meaning as under federal law absent a contrary requirement, the Department looked to how the IRS and federal courts treat section 501(d) organizations. Filing a Form 1065 does not make an organization a partnership - it is simply the reporting mechanism the IRS uses to figure out how much of the organization's income each member must report as a dividend. Courts have held that 501(d) organizations are not partnerships for purposes of the federal investment tax credit (Kleinsasser v. United States) and that an incorporated organization cannot be a partnership under IRC § 7701(a)(2)'s definition, which is limited to unincorporated organizations (O'Neill v. United States). A member's pro rata share of a 501(d) organization's income is treated as a dividend, not a distributive share of partnership income.

Because Petitioner is a corporation and not a partnership for federal income tax purposes, and New York's income tax terms track federal meaning under Tax Law § 607(a), Petitioner is likewise not a partnership for New York income tax purposes. Consequently, its individual members are not entitled to a pass-through of investment tax credits or any other tax incentives the organization accrues in New York.

What this means for you

Section 501(d) religious or apostolic organizations doing business in New York

Filing federal Form 1065 to report your common-treasury income does not turn your organization into a partnership for New York tax purposes. You remain a corporation, and any New York investment tax credits or other tax incentives your business activity generates stay with the organization - they do not flow through to individual members' personal income tax returns.

Members and their accountants

Don't treat a section 501(d) member's dividend-like share of pooled income as if it were a partnership distributive share carrying separately-stated credit items. Under this ruling, credits and incentives earned by the organization's New York business activity cannot be claimed on a member's individual return.

Common questions

Q: Does filing Form 1065 make a section 501(d) organization a partnership for New York tax purposes?
A: No. Form 1065 is only the mechanism the IRS uses to determine each member's pro rata share of taxable income; it does not change the organization's underlying corporate character.

Q: Why can't members claim a share of the organization's New York investment tax credits?
A: Because the organization is a corporation, not a partnership, for both federal and New York income tax purposes (Tax Law § 607(a) ties New York's meaning of terms to federal law), and only partnership items pass through to owners. A member's share of the organization's income is treated as a dividend, not a distributive share of partnership income.

Q: What federal cases did the Department rely on?
A: Kleinsasser v. United States (9th Cir. 1983), holding 501(d) members were not entitled to the federal investment tax credit because 501(d) organizations are not partnerships, and O'Neill v. United States (10th Cir. 1969), holding an incorporated organization cannot be a partnership under IRC § 7701(a)(2). The Department also cited Blume v. Gardner for the point that filing a partnership return doesn't make an entity an actual partnership.

Q: Does this ruling apply to any religious organization, or only to Petitioner?
A: This Advisory Opinion is limited to the facts Church Communities Inc. presented and binds the Department only as to that petitioner, but the underlying legal reasoning - that section 501(d) organizations are corporations, not partnerships - would apply to similarly structured organizations under the same law.

Citations and references

• Tax Law § 607(a) - New York income tax terms have the same meaning as under federal income tax law unless a different meaning is clearly required
• IRC § 501(a) - general exemption from federal taxation for organizations described in section 501(c) or (d)
• IRC § 501(d) - religious or apostolic associations with a common treasury are exempt if members include their pro rata share of income in gross income
• IRC § 7701(a)(2) - defines "partnership" as an unincorporated organization; an incorporated entity cannot be a partnership
• Treas. Reg. § 1.501(d)-1(a) - describes the common-treasury requirement for section 501(d) exemption
• Treas. Reg. § 1.6033-1(a)(5)(i) - requires section 501(d) organizations to file Form 1065 reporting members' distributive shares
• Kleinsasser v. United States, 707 F.2d 1024 (9th Cir. 1983) - 501(d) members not entitled to federal investment tax credit because the organization is not a partnership
• O'Neill v. United States, 410 F.2d 888 (10th Cir. 1969) - an incorporated organization cannot be a partnership
• Blume v. Gardner, 262 F. Supp. 405, aff'd 397 F.2d 809 (6th Cir. 1968) - filing a partnership return does not make an organization a partnership

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2007.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a07_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-07(4)I
Income Tax
April 13, 2007

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I061027A

On October 27, 2006, a Petition for Advisory Opinion was received from Church
Communities Inc., c/o David L. Evans, CPA, UHY Advisors NY, Inc., 66 State Street, Albany,
New York 12207.
The issue raised by Petitioner, Church Communities Inc., is how to allocate investment
tax credits and other economic-based tax incentives among members of a tax-exempt
organization recognized under section 501(d) of the Internal Revenue Code (IRC) when that
organization engages in business activity in New York State.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a religious or apostolic organization recognized under section 501(d) of the
IRC (501(d) organization). As a 501(d) organization, Petitioner has a common treasury and
engages in business for the common benefit of its individual members. Petitioner’s business
activity involves manufacturing wood furniture, toys, and mobility equipment for the physically
challenged. Petitioner plans to expand its business in New York State.
For federal income tax purposes, Petitioner is required to compute its net income as a
corporation and file an annual information return on Form 1065, U.S. Return of Partnership
Income, to report income of the common treasury. The entire taxable income of Petitioner is
allocated to its members and reported as a dividend on each member’s federal personal income
tax return.
Petitioner’s members, all of whom have lifetime vows of personal poverty and obedience,
live communally. Members have no private property and are not paid salaries or other
remuneration. Collectively and for the common benefit, the members operate a variety of
domestic manufacturing businesses. Income earned by an individual member’s efforts is pooled
into the common treasury, from which goods and provisions are purchased and distributed to
members on the basis of need. All members are supported at the same modest standard of living,
regardless of their economic contribution to the common treasury.
Applicable law and regulations
Section 501(a) of the IRC provides:

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Exemption from taxation. An organization described in subsection (c) or (d) or
section 401(a) shall be exempt from taxation under this subtitle unless such exemption is
denied under section 502 or 503.
Section 501(d) of the IRC provides:
Religious and apostolic organizations. The following organizations are referred
to in subsection (a): Religious or apostolic associations or corporations, if such
associations or corporations have a common treasury or community treasury, even if such
associations or corporations engage in business for the common benefit of the members,
but only if the members thereof include (at the time of filing their returns) in their gross
income their entire pro rata shares, whether distributed or not, of the taxable income of
the association or corporation for such year. Any amount so included in the gross income
of a member shall be treated as a dividend received.
Section 7701(a)(2) of the IRC provides:
Partnership and partner. The term "partnership" includes a syndicate, group, pool,
joint venture, or other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on, and which is not, within the
meaning of this title, a trust or estate or a corporation; and the term "partner" includes a
member in such a syndicate, group, pool, joint venture, or organization.
Section 1.501(d)-1(a) of the Treasury Regulations provides:
Religious or apostolic associations or corporations are described in section 501(d)
and are exempt from taxation under section 501(a) if they have a common treasury or
community treasury, even though they engage in business for the common benefit of the
members, provided each of the members includes (at the time of filing his return) in his
gross income his entire pro rata share, whether distributed or not, of the net income of the
association or corporation for the taxable year of the association or corporation ending
with or during his taxable year. Any amount so included in the gross income of a member
shall be treated as a dividend received.
Section 1.6033-1(a)(5)(i) of the Treasury Regulations provides:
Every religious or apostolic association or corporation described in section 501(d)
which is exempt from taxation under section 501(a) shall file a return on Form 1065 for
each taxable year, stating specifically the items of gross income and deductions, and its
taxable income. There shall be attached to the return as a part thereof a statement
showing the name and address of each member of the association or corporation and the

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amount of his distributive share of the taxable income of the association or corporation
for such year.
Section 301.6104(d)-1 of the Treasury Regulations provides, in part:
(a) In general. Except as otherwise provided in this section, if a tax-exempt
organization (as defined in paragraph (b)(1) of this section) filed an application for
recognition of exemption under section 501, it shall make its application for tax
exemption (as defined in paragraph (b)(3) of this section) available for public inspection
without charge at its principal, regional and district offices during regular business hours.
Except as otherwise provided in this section, a tax-exempt organization shall make its
annual information returns (as defined in paragraph (b)(4) of this section) available for
public inspection without charge in the same offices during regular business hours. . . .
(b) Definitions. For purposes of applying the provisions of section 6104(d), this
section and section 301.6104(d)-2 and 301.6104(d)-3, the following definitions apply:
(1) Tax-exempt organization. The term tax-exempt organization means any
organization that is described in section 501(c) or section 501(d) and is exempt from
taxation under section 501(a). The term tax-exempt organization also includes any
nonexempt charitable trust described in section 4947(a)(1) or nonexempt private
foundation that is subject to the reporting requirements of section 6033 pursuant to
section 6033(d).
*

*

*

(4) Annual information return (i) In general. Except as described in paragraph
(b)(4)(ii) of this section, the term annual information return includes an exact copy of any
return filed by a tax-exempt organization pursuant to section 6033. It also includes any
amended return the organization files with the Internal Revenue Service after the date the
original return is filed. Returns filed pursuant to section 6033 include Form 990, Return
of Organization Exempt From Income Tax, Form 990-PF, Return of Private Foundation,
or any other version of Form 990 (such as Forms 990-EZ or 990-BL, except Form 990-T)
and Form 1065. Each copy of a return must include all information furnished to the
Internal Revenue Service on the return, as well as all schedules, attachments and
supporting documents. . . .
Section 607(a) of the Tax Law provides:
General. Any term used in this article shall have the same meaning as when used
in a comparable context in the laws of the United States relating to federal income taxes,
unless a different meaning is clearly required but such meaning shall be subject to the

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exceptions or modifications prescribed in this article or by statute. Any reference in this
article to the laws of the United States shall mean the provisions of the internal revenue
code of nineteen hundred eighty-six (unless a reference to the internal revenue code of
nineteen hundred fifty-four is clearly intended), and amendments thereto, and other
provisions of the laws of the United States relating to federal income taxes, as the same
may be or become effective at any time or from time to time for the taxable year.
Opinion
A partnership is a conduit for New York State income tax purposes. Conduit treatment
for partnerships means that any partnership items of income, gain, loss, deduction, and credit
(e.g., investment tax credit) pass through to the partner and are claimed on the partner’s tax
return.
Pursuant to section 607(a) of the Tax Law, any term used for purposes of the New York
personal income tax shall have the same meaning as used in the laws of the United States
relating to federal income taxes unless a different meaning is clearly required.
A religious or apostolic organization described in section 501(d) of the IRC is exempt
from federal income tax under section 501(a) of the IRC. Section 1.6033-1(a)(5)(i) of the
Treasury Regulations provides that the organization must file federal Form 1065, U.S. Return of
Partnership Income, to report its taxable income. The filing instructions for Form 1065 provide
that an IRC section 501(d) organization must determine its taxable income in the same manner as
a corporation. Section 501(d) of the IRC provides that each member of a section 501(d)
organization must include his or her entire pro rata share of the organization’s taxable income on
his or her personal income tax return. The pro rata share included in the member’s federal gross
income is treated as a dividend. Accordingly, the character of the organization’s items of income
and deduction is not passed through to its members.
Petitioner is a corporation. The mere filing of a partnership return does not mean that
Petitioner, as a 501(d) organization, is in fact a partnership for federal income tax purposes (see
Blume v Gardner, 262 F Supp 405, affd, 397 F 2d 809 [6th Cir 1968]). The partnership tax return
allows the Internal Revenue Service (IRS) to determine how much income must be reported by a
section 501(d) organization’s members. In Kleinsasser v United States, 707 F 2d 1024 (9th Cir
1983), the court held, in pertinent part, that members of a 501(d) organization were not entitled
to the federal investment tax credit on farm equipment and machinery purchased by the
organization because 501(d) organizations are not partnerships. Further, section 7701(a)(2) of
the IRC defines a partnership as an unincorporated business. An incorporated organization
cannot be a partnership for federal income tax purposes. (see O’Neill v United States, 410 F 2d
888, 893 [10th Cir 1969]). Lastly, a member’s share of a 501(d) organization’s income
constitutes a dividend received and, as such, is not considered a distributive share of partnership

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gross income subject to the federal tax on net earnings from self-employment. (See IRS Revenue
Ruling 58-328, 1958-1 C.B. 327.)
Accordingly, Petitioner is not a partnership for New York State income tax purposes, and
the individual members of Petitioner are not allowed a pass-through of any tax credits or other
tax incentives that may be accrued by Petitioner.

DATED: April 13, 2007

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory opinions are
limited to the facts set forth therein.