Expert: John Varghese - 4/29/2011

Question
Hi John

There is a FL 501(c)(6) corporation that allows chapters to join. To join they must go through a process where they submit an application to the parent, wait for approval, then adopt and follow the bylaws of the parent.

In those bylaws it states that every chapter must also use the EIN of the parent. It was written long ago so I'm not sure if the purpose for that bylaw was an attempt to share the parent's tax exempt status with the chapters, or if they thought that by using the parent's EIN that would somehow transfer ownership or control of the chapters to the parent, or if it was was an attempt to save the chapters from having to do tax their own tax returns.  Not sure, but based on IRS pub 557 p.7 and IRS pub 1635 p.5 it would appear that each 501(c) chapter under a parent 501(c) is required by Federal law to have its own unique EIN.  Although, that's a little unclear in 557 because that's the section about group exemption and I'm not sure this parent even files one of those.  1635 seems more clear, but it uses the term subsidiary and there's no acquisition or merger or purchase that takes place between this parent and its chapters, just that application and subsequent adoption of the parent's bylaws.

Is all this legal?  Can one corporation specify in their bylaws that another corporation must use its EIN?  Is it legal for multiple distinct FL corporations to register the same EIN with the state without some kind of a more formal acquisition or merger between them?  If this parent currently has several active FL corporations all using its EIN is this a problem?

Thanks for your time, it's much appreciated

Answer
Dear Darren,

To understand this position, I need to know how the corporation is organised. Are the chapters incorporated as separate corporation or they are incorporated as divisions of the same corporation. If the "chapters" are incorporated as separate corporations, they have a principal-subsidiary relationship and then each chapter should have separate EIN. On the other hand if the corporation is only forming separate divisions, which does not have independent legal entity of its own(like branch offices of a main corporation(- a good example is how Macdonald's chain works- each branch is only an extended arm of the parent corporation) then they can work under the EIN of the parent corporation. For more details read http://www.irs.gov/businesses/small/article/0,,id=98011,00.html


Regards

John Varghese