First some background - remember the names have been changed to protect the participants, but I assure you that the facts as stated are accurate.
There is a very old organization that was chartered by the Maryland legislature on February 8, 1822 - YES, that date is correct 02/08/1822
- Long before MD SDAT ever existed.
It is a non-stock, non-profit organization that is NOT tax exempt. I'll not get into why it isn't tax exempt, just accept that it is NOT and NEVER will be tax exempt.
There are many local chapters of this group which have organized (opened and closed) over the years. All of the local chapters come under the care and guidance of the parent organization. None of the local chapters are allowed to form via the Secretary of State nor are they allowed to file for or obtain Federal or State ID numbers. I know this sounds odd, but trust me this is allowed by the Maryland when the parent organization formed back in 1822 - before we had all the hoops we jump through now.
Many of these local chapters formed Holding Companies for the sole purpose of owning the land and building where they held their meetings. The vast majority of these holding companies are all organized as nonstock, nonprofit entities and they all have Federal and State ID numbers. NONE of these holding companies are tax exempt
- they do NOT enjoy 501(c)(3) status.
The local chapters owned their meeting houses but over the years they've turned the real property over to the holding companies to manage - I won't get into why so don't ask, just trust me that it is perfectly legal.
The holding companies usually have very little income - they lease the use of the buildings back to the local chapters under a triple net lease agreement, thereby shifting all the costs of operation back to the local chapter. The local chapter is supported by dues and donations from the membership.
Most of the local chapters and their associated holding companies have had so little income that they have never, ever had to file an income tax return. For the vast majority of these groups the income - income is too strong a word, really - let's say the money that changes hands
- is in the $10,000 OR LESS per year range. So they have never filed an income tax return because one was never required.
NOW we get to the meat of the problem -
One of the local holding companies has recently sold the building that they owned. It was in a historic district and fetched a very nice price for the group - just shy of $1,000,000 dollars. Here's the problem -
The building that they sold was (supposedly) acquired in a tax free exchange many years ago, but no one knows exactly when. There are no documents supporting the exchange.
No one knows when the old building was acquired or what it cost. The old building was owned by, controlled by or in the hands of (take your pick) the local holding company for well over 100 years before it was exchanged for the new building.
So -
I can do the math to calculate the gain - assuming I can find something to use as basis -
BUT ON WHAT FORM DO WE REPORT THE GAIN AND PAY THE TAX?
Form 990 seems to be for tax exempt entities which this group is NOT.
They clearly are NOT an LLC or a partnership so 1065 is OUT - Similarly, we can't use Form 1120S.
I always thought Form 1120 was for "For-Profit" corporations - which this holding company is NOT! Also, as a side note, the group understands that tax may be due on the gain, but they are hoping to pay tax as long term capital gains and Form 1120 has NO SUCH provision
- C Corporations don't get the LTCG tax bracket break.
I don't really do much work in this area. And even though I'm an EA and have been practicing for more than 25 years, for the life of me, I cannot get my head around this one.
Any ideas or suggestions on what form to use to report the gain?
I'll answer the questions I can and try to explain why I can't answer the ones I can't. While this is a well known organization, I am trying my best to keep the players as confidential as I can.
I assure you that this issue is on the level, Gene E. Utterback, EA, RFC, ABA If you like, you may contact me off the NG at gene at alliancetax dot com