I have a situation where a state governmental entity would arguably control a tax-exempt (501(c)(3)) entity under the new controlled group rules. 1.414(c)-5. The tax-exempt entity, in turn, owns one or more physician practice groups. It seems pretty clear that I have a controlled group as between the tax-exempt and the physician practice group(s). But is the governmental entity also aggregated? I note that the preamble to the final regulations states that these controlled group rules "do not apply to a state or local government or a federal government entity." It seems clear that these rules do not apply to aggregate two or more related governmental entities. But would this also apply in my situation to "break the chain" between the governmental entity and the tax exempt entity? Any thoughts or insights would be appreciated.

Did you ever find an answer to this question? I'm looking at a very similiar situation.

My understanding is that the 2007 regs do not apply to governmental entities and that governmental entities should continue to apply a reasonable good faith interpretation based on prior guidance available such as IRS Notice 89-23, various PLRs, language of the Code, Regs, etc. Interested in other views.