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COMPREHENSIVE VOLUME--CHAPTER 23--EXEMPT
ENTITIES
Student:
___________________________________________________________________________
1. A church is one of the types of exempt organizations.
True False
2. While the major objective of the Federal income tax law is to
raise revenue, social considerations and
economic objectives also affect the tax law.
True False
3. All organizations that are exempt from Federal income tax are
exempt under 501(c)(3).
True False
4. An exempt entity in no circumstance is subject to Federal
income tax.
True False
5. To satisfy the not for profit requirement for exempt status,
the entity may not be engaged in a trade or business.
True False
6. General requirements for exempt status include the
organization serving the common good and the
organization being a not-for-profit entity.
True False
7. Engaging in a prohibited transaction can result in an exempt
organization being subject to Federal income
tax, but cannot cause it to lose its exempt status unless the
exempt organization repeats the prohibited
transaction.
True False
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8. The League of Women Voters is a 501(c)(3) organization.
True False
9. George is running for mayor of Culpepper. The members of
Third Church adamantly oppose his
candidacy. They would like to run a political advertisement in
the local newspaper opposing his
candidacy. The newspaper ad would have no effect on Third
Churchs exempt status because the ad opposes George; it does not
support his opponent.
True False
10. Certain 501(c)(3) exempt organizations are permitted to
engage in lobbying activities in the same manner
as taxable organizations.
True False
11. Certain 501(c)(3) exempt organizations are permitted to
engage in lobbying activities on a limited basis.
An example of such an exempt organization is a church.
True False
12. An intermediate sanction imposed by the IRS on an exempt
organization is a greater sanction than
revocation of exempt status.
True False
13. A feeder organization is an exempt organization that
provides funding for nutritional programs for children.
True False
14. A feeder organization is exempt from Federal income taxation
because it carries on a trade or business for
the benefit of an exempt organization and remits its profits to
the exempt entity.
True False
15. Theater, Inc., an exempt organization, owns a printing
company, Printers, Inc., which remits 85% of its
profits (i.e., taxable income of $100,000) to Theater, Inc.
Since Printers remits at least 85% of its profits to
Theater, neither Theater, Inc., nor Printers, Inc., must pay
income tax on this $85,000 ($100,000 85%).
True False
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16. An educational organization such as the College of William
and Mary that is exempt under 501(c)(3)
cannot be classified as a private foundation if its only sources
of revenue are from tuition and alumni
contributions.
True False
17. The tax consequences to a donor of making a charitable
contribution to an exempt organization classified as
a private foundation may be less favorable than the tax
consequences to a donor of making a charitable
contribution to an exempt organization that is not classified as
a private foundation.
True False
18. To be classified as a private foundation, the exempt status
of an organization can be provided under either
501(c)(1) or 501(c)(3).
True False
19. To satisfy the broadly supported provision to avoid
classification as a private foundation, the exempt
organization must satisfy both an external support test and an
internal support test. Under the internal support
test, more than one-third of the exempt organizations support
for the taxable year must come from gross investment income and
unrelated business taxable income.
True False
20. The excise taxes such as the tax on self-dealing and the tax
on excess business holdings are imposed on
exempt organizations classified as private foundations and are
not imposed on exempt organizations classified
as public charities.
True False
21. Some of the excise taxes which may be imposed on private
foundations may be imposed on both the private
foundation and the foundation manager.
True False
22. The purpose of the excise tax imposed on a private
foundation for failure to distribute sufficient levels of
income is to motivate the foundation to distribute more of its
income for application to exempt purposes and
thus be classified as a feeder organization.
True False
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23. The excise tax imposed on a private foundations investment
income can be imposed as an initial (first-level) tax but cannot be
imposed as an additional (second-level) tax.
True False
24. The excise tax imposed on private foundations for excess
business holdings is imposed on investments that
enable the private foundation to control publicly-held rather
than privately-held businesses.
True False
25. The excise tax that is imposed on private foundations for
making jeopardizing investments is imposed
because the foundation has made speculative investments that put
the foundations income at risk. True False
26. The unrelated business income tax (UBIT) is calculated by
multiplying unrelated business taxable income
by the highest corporate tax rate.
True False
27. Federal agencies exempt from Federal income tax under
501(c)(1) are not subject to the unrelated business
income tax (UBIT).
True False
28. For purposes of the unrelated business income tax (UBIT), a
trade or business consists of any activity
conducted for the production of income through the sale of
merchandise, or from the performance of services
for which profits have been earned during at least two of the
five previous years.
True False
29. The trade or business of selling merchandise where
substantially all of the merchandise has been received as
contributions or gifts is not subject to the unrelated business
income tax, but is subject to the tax on feeder
organizations.
True False
30. A profit-related activity of an exempt organization avoids
the unrelated business income tax if greater than
80% of the merchandise sold had been received as a
contribution.
True False
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31. If an exempt organization conducts a trade or business that
is regularly carried on by the organization, it is
subject to the unrelated business income tax (UBIT).
True False
32. For an exempt organization to be subject to the unrelated
business income tax, the trade or business must
not be substantially related to the exempt purpose of the
organization.
True False
33. A corporate sponsorship payment that is contingent on
attendance at a sporting event increases the amount
of unrelated business income.
True False
34. The income from a bingo game or a casino game conducted by
an exempt organization may be unrelated
business income.
True False
35. The key factors in determining whether an exempt entitys
income from a bingo game is unrelated trade or business income are
whether substantially all the work is performed by volunteers and
all of the prizes to be
awarded are received as donations.
True False
36. An exempt organization is located in the state of Nevada.
Gambling in Nevada is legal. Therefore, bingo
games are conducted by both taxable and tax-exempt
organizations. If the net earnings from the bingo games
are less than $25,000, the exempt organization is not subject to
the unrelated business income tax (UBIT).
True False
37. Revenue generated by an exempt organization from the
distribution of low-cost items is not income from
an unrelated trade or business.
True False
38. If an exempt organization conducts a trade or business that
consists of either exchanging or renting to other
exempt organizations the organizations donor or membership list,
such trade or business is an unrelated trade or business.
True False
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39. For an activity to be considered as regularly carried on for
purposes of the unrelated business income tax,
the activity must be conducted during the work week (i.e.,
activities performed on the weekend are not
considered in determining if the activity is regularly carried
on).
True False
40. In calculating unrelated business taxable income, the exempt
organization is permitted to deduct only the
charitable contributions associated with the unrelated trade or
business.
True False
41. Unrelated debt-financed income, net of the unrelated
debt-financed deductions, is subject to the unrelated
business income tax only if the exempt organization is a private
foundation.
True False
42. Personal property rental income is subject to and real
property rental income is not subject to the unrelated
business income tax.
True False
43. If personal property is leased with real property and more
than 45% of the rent income under the lease is
from personal property, all of the rent income is subject to the
unrelated business income tax.
True False
44. If the unrelated business income of an exempt organization
is $25,000 or less, the unrelated business income
tax (UBIT) will be $0.
True False
45. Debt-financed property consists of all real property of a
tax-exempt organization on which there is a
mortgage.
True False
46. Only certain exempt organizations must obtain IRS approval
to obtain exempt status.
True False
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47. Even though a church is not required to obtain IRS approval
of its exempt status, it still annually must file a
Form 990.
True False
48. The due date for the Exempt Organization Business Income Tax
Return (Form 990-T) is the fifteenth day of
the third month after the end of the taxable year.
True False
49. All exempt organizations which are subject to the unrelated
business income tax must file Form 990-T
(Exempt Organization Business Income Tax Return).
True False
50. Unless the widely available provision is satisfied, a
501(c)(3) exempt organization (excluding churches and private
foundations) must make copies of the following available to the
general public: Form 990 (Return
of Organization Exempt from Income Tax) and Form 1023
[Application for Recognition of Exemption under
501(c)(3)] or Form 1024 [Application for Recognition of
Exemption under 501(a)].
True False
51. Which of the following qualify as exempt organizations?
A. Federal and related agencies.
B. Religious, charitable, and educational organizations.
C. Civic leagues.
D. Social clubs.
E. All of the above can be exempt from tax.
52. Which of the following are exempt organizations?
A. National Football League (NFL).
B. American Bankers Association (ABA).
C. Professional Golfers Association (PGA).
D. Only a. and c.
E. a., b., and c.
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53. Which of the following is not an example of an exempt
organization?
A. Religious, charitable, or educational organization.
B. Voluntary employees beneficiary association. C. Labor,
agricultural, or horticultural organization.
D. Stock exchange.
E. All of the above can be exempt from tax.
54. Which of the following are organizations exempt under
501(c)(3)?
A. Girl Scouts of America.
B. Washington and Lee University.
C. Veterans of Foreign Wars (VFW).
D. Only a. and b. are 501(c)(3) organizations.
E. All of the above are 501(c)(3) organizations.
55. Which of the following attributes are associated with exempt
organizations?
A. Organization serves some type of common good.
B. Organization is not a for profit entity.
C. Net earnings do not benefit the members of the
organization.
D. Organization does not exert political influence.
E. All of the above statements are true.
56. Garden, Inc., a qualifying 501(c)(3) organization, incurs
lobbying expenditures of $210,000 during the
taxable year. Exempt purpose expenditures are $900,000. If
Garden makes the election under 501(h) to
make lobbying expenditures on a limited basis, its tax liability
resulting from the lobbying expenditures is:
A. $0.
B. $12,500.
C. $50,000.
D. $60,000.
E. None of the above.
57. Which of the following statements is incorrect?
A. No exempt organizations can engage in any lobbying
activities.
B. Certain exempt organizations can elect to engage in lobbying
activities on a limited basis.
C. Churches can engage in lobbying activities on an unlimited
basis because of the separation of church and
state provision.
D. Only b. and c. are incorrect.
E. Only a. and c. are incorrect.
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58. Which of the following are available options for the IRS in
dealing with an exempt organization entering
into prohibited transactions?
A. Attempt to subject all or part of the organizations income to
Federal income tax. B. Revoke the exempt status of the
organization.
C. Impose intermediate sanctions in the form excise taxes.
D. Only a. and b.
E. a., b., and c.
59. Which of the following statements regarding intermediate
sanctions is correct?
A. Intermediate sanctions are self-assessing (i.e., calculated
and paid by the taxpayer rather than being imposed
by the IRS).
B. The excise tax is imposed on the exempt organization and on
disqualified persons.
C. Both a first-level tax and a second-level tax may apply.
D. The corporate tax rates apply in calculating the amount of
the tax liability.
E. None of the above is correct.
60. Which of the following statements is correct?
A. A feeder organization is a division of a tax-exempt
organization and it is not subject to the Federal income
tax.
B. A feeder organization is a tax-exempt organization whose
purpose is to provide food to underprivileged
children.
C. A feeder organization is a taxable organization whose purpose
is to provide reduced cost meals to its
employees that are excluded from the employees gross income. D.
Only a. and b. are correct.
E. None of the above statements is correct.
61. Which of the following activities is not subject to the
feeder organization rules?
A. At least 80% of the net income of the for-profit entity is
contributed to the exempt organization for a
consecutive three-year period.
B. A trade or business where substantially all the work is
performed by volunteers.
C. A trade or business of selling merchandise where
substantially all of the merchandise has been received as
contributions or gifts.
D. Only b. and c.
E. a., b., and c.
62. A 501(c)(3) organization that otherwise would be classified
as a private foundation can avoid such
classification if it satisfies:
A. Only an external support test.
B. Only an internal support test.
C. Both an external support test and an internal support
test.
D. An external support test, an internal support test, and a
good faith test.
E. None of the above.
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63. Which of the following 501(c)(3) exempt organizations is
appropriately classified as a private
foundation?
A. First Methodist Church.
B. University of Richmond.
C. Williamsburg Community Hospital.
D. Salvation Army.
E. None of the above.
64. Blue, Inc., receives its support from the following
sources.
Governmental unit A, for services rendered $18,000
General public, for services rendered 25,000
Gross investment income 8,000
Contributions from individual substantial contributors
(disqualified persons) 19,000
Which of the following statements is correct?
A. Blue, Inc., is a private foundation because it satisfies the
external support test and fails the internal support
test.
B. Blue, Inc., is not a private foundation because it fails both
the internal and external support tests.
C. Blue, Inc., is a private foundation because it satisfies both
the external support test and the internal support
test.
D. Blue, Inc., is not a private foundation because it satisfies
both the external support test and the internal
support test.
E. None of the statements is true.
65. Which of the following statements is correct?
A. A private foundation is, in general, exempt from Federal
income tax.
B. A private foundation may be subject to certain types of
Federal income tax.
C. If a broad public support test is satisfied, an exempt
organization that otherwise would be classified as a
private foundation is not classified as a private
foundation.
D. Only b. and c. are correct.
E. a., b., and c. are correct.
66. Which of the following excise taxes are imposed on private
foundations?
A. Tax on failure to distribute income.
B. Tax on excess business holdings.
C. Tax on excess charitable contributions.
D. Only a. and b.
E. a., b., and c.
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67. Which of the following taxes that are imposed on private
foundations is, effectively, an audit fee to defray
IRS expenses?
A. Tax on self-dealing.
B. Tax on failure to distribute income.
C. Tax on excess business holdings.
D. Only a. and c.
E. None of the above.
68. A private foundation is subject to which of the following
taxes?
A. Tax on self-dealing.
B. Tax on investments in publicly traded stock.
C. Tax on taxable expenditures that jeopardize charitable
purposes.
D. Only a. and c.
E. a., b., and c.
69. Which of the following excise taxes are imposed on the
private foundation because it engages in prohibited
transactions?
A. Tax on investment income.
B. Tax on self-dealing.
C. Tax on failure to distribute income.
D. Only b. and c.
E. a., b., and c.
70. Teal, Inc., is a private foundation which failed to
distribute an adequate amount of income for the exempt
purpose of Teal. Which of the following statements is
correct?
A. An excise tax in the form of an initial tax at the rate of 5%
may be imposed on Teal.
B. An excise tax in the form of an initial tax at the rate of
2.5% may be imposed on the foundation manager.
C. An excise tax in the form of an additional tax at the rate of
100% may be imposed on Teal.
D. An excise tax in the form of an additional tax at the rate of
50% may be imposed on the foundation manager.
E. None of the statements is correct.
71. Which of the following statements regarding the unrelated
business income tax is not correct?
A. Unrelated business income is income from activities not
related to the exempt purpose of the exempt
organization.
B. The unrelated business income tax is levied because the
exempt organization is engaging in substantial
commercial activities.
C. If the unrelated business income tax were not levied,
nonexempt organizations would be placed at a
substantial disadvantage when trying to compete with the exempt
organization.
D. The tax rate that is applied to unrelated business taxable
income is the highest corporate tax rate.
E. All of the above statements are correct.
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72. Which of the following statements is correct regarding the
unrelated business income tax (UBIT)?
A. To be subject to the UBIT, the exempt organization must
conduct a trade or business, the trade or business is
not substantially related to the exempt purpose of the
organization, and the trade or business is regularly carried
on by the organization.
B. To be subject to the UBIT, the exempt organization must
conduct a trade or business, the trade or business
must be substantially related to the exempt purpose of the
organization, and the trade or business must be
regularly carried on by the organization.
C. To be subject to the UBIT, the exempt organization must
conduct a trade or business, the trade or business is
not substantially related to the exempt purpose of the
organization, and the trade or business is carried on during
more than half the year.
D. An exempt entity that conducts a business that competes with
for-profit businesses automatically is subject
to the UBIT.
E. None of the above statements is correct.
73. Third Church operates a gift shop in its parish house. The
total income of the church is $800,000. Of this
amount, $300,000 comes from offerings and $500,000 comes from
the net income of the gift shop. The gift
shop operations are conducted by six full-time, paid employees.
Which of the following statements is correct?
A. The $800,000 is unrelated business income.
B. The $500,000 of gift shop net income is unrelated business
income.
C. The $300,000 is unrelated business income because the gift
shop is a feeder organization.
D. None of the $800,000 is unrelated business income.
E. The unrelated business income tax does not apply to
churches.
74. Which of the following statements regarding the unrelated
business income tax is correct?
A. Private foundations are subject to the unrelated business
income tax.
B. Bingo games are not subject to the unrelated business income
tax if they are conducted by an exempt
organization.
C. The exchange or rental of membership lists with other exempt
and nonexempt organizations is not an
unrelated trade or business.
D. All of the above statements are correct.
E. None of the above statements is correct.
75. Which of the following statements are correct with respect
to the unrelated business income tax?
A. Under certain circumstances, a corporate sponsorship payment
can be classified as not being an unrelated
trade or business.
B. Under certain circumstances, a casino game can be classified
as not being an unrelated trade or business.
C. Under certain circumstances, the exchanging or renting of
membership lists to other exempt organizations
can be classified as not being an unrelated trade or
business.
D. Only a. and c. are correct.
E. a., b., and c. all are correct.
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76. Which of the following are qualified corporate sponsorship
payments?
A. The amount of the payment by the corporation to the exempt
organization is contingent on the attendance at
one or more events.
B. The payment by the corporation to the exempt organization
results in only a half-page advertisement in the
event program.
C. The payment by the corporation to the exempt organization
results in the corporate logo appearing in the
exempt organizations monthly newsletter. D. Only b. and c.
E. a., b., and c.
77. Which of the following requirements must be satisfied for a
bingo game to be classified as not being an
unrelated trade or business?
A. The bingo game is legal under both state and local law.
B. The bingo game is conducted by volunteers.
C. For-profit bingo games ordinarily are not permitted in the
jurisdiction.
D. Only a. and b. must be satisfied.
E. Only a. and c. must be satisfied.
78. Which of the following statements regarding low-cost
articles is correct?
A. The distribution of low-cost articles can be classified as
not being an unrelated trade or business.
B. For 2013, a low-cost article is one that costs $10.20 or
less.
C. Any contributions received as the result of the distribution
of low-cost articles must be included in unrelated
business income.
D. Only a. and b. are correct.
E. a., b., and c. are correct.
79. Tan, Inc., a tax-exempt organization, has $65,000 of net
unrelated business income. Total charitable
contributions (all associated with the unrelated trade or
business) are $7,500. Assuming that the $7,500 was
deducted in calculating net unrelated business income, what is
Tans unrelated business taxable income? A. $57,500.
B. $65,250.
C. $66,000.
D. $72,500.
E. Some other amount.
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80. Maroon, Inc., a tax-exempt organization, leases a building
and equipment to Brown Partnership. The rental
income from the building is $100,000 and from the equipment is
$9,000. Rental expenses are $40,000 for the
building and $4,000 for the equipment. What adjustment must be
made to net unrelated business income?
A. $0.
B. ($60,000).
C. ($65,000).
D. ($109,000).
E. Some other amount.
81. For purposes of the unrelated business income tax (UBIT),
land that is acquired by the exempt organization
for later exempt-use is excluded from the definition of
debt-financed property if certain requirements are
satisfied. Which of the following is not included in the
requirements?
A. The principal purpose of acquiring the land is for use
(substantially all) in achieving the organizations exempt
purpose.
B. The fair market value of the land is not over 50% of the fair
market value of land presently owned by the
exempt organization.
C. The use of the land by the exempt organization will begin
within ten years of the acquisition date.
D. At the date the land is acquired, it is located in the
neighborhood of other property of the organization for
which substantially all the use is for achieving the
organizations exempt purpose. E. All of the above are
requirements.
82. Which of the following is one of the requirements that will
enable mortgaged land acquired by an exempt
organization for later exempt use to be excluded from
debt-financed property, for purposes of the unrelated
business income tax?
A. The principal purpose of acquiring the land is for
investment.
B. The land is used within ten years of the acquisition date in
the organizations exempt purpose. C. The land is located in the
United States.
D. Only a. and b.
E. None of the above.
83. Acquisition indebtedness consists of the unpaid amounts of
which of the following for debt-financed
property?
A. Debt incurred in acquiring or improving the property.
B. Debt incurred to enable the organization to carry out its
exempt purpose.
C. Debt incurred to enable the exempt organization to acquire a
feeder organization.
D. Only a. and b.
E. a., b., and c.
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84. Which of the following are consequences of tax-exempt
status?
A. Not necessary to file a Federal income tax return.
B. Generally exempt from Federal income tax.
C. Contributions to the exempt organization are deductible by
the donor.
D. Only b. and c.
E. a., b., and c.
85. Which of the following exempt organizations are required to
file Form 990 (Return of Organization Exempt
from Income Tax)?
A. Federal agencies.
B. Churches.
C. Exempt organizations whose annual gross receipts do not
exceed $50,000.
D. Private foundations.
E. None of these entities must file Form 990.
86. Which of the following statements are correct?
A. If an exempt organization has annual gross receipts of less
than $50,000, it files Form 990-N.
B. Private foundations must file Form 990-PF (Return of Private
Foundation).
C. An exempt organization with less than $250,000 in gross
receipts may file a Form 990-EZ.
D. Only a. and b. are correct.
E. a., b., and c. all are correct.
87. Which of the following statements regarding exempt
organization filing requirements is incorrect?
A. Churches are required to file Form 990 (Return of
Organization Exempt from Income Tax) only if its annual
gross receipts exceed $50,000.
B. The due date for Form 990 (Return of Organization Exempt from
Income Tax) is the fifteenth day of the fifth
month after the end of the taxable year, whereas for private
foundations the due date for Form 990-PF (Return
of Private Foundation) is the fifteenth day of the fourth month
after the end of the tax year.
C. Exempt organizations whose annual gross receipts do not
exceed $50,000 can file an e-Postcard.
D. Only a. and b. are incorrect.
E. a., b., and c. are incorrect.
88. Which of the following statements regarding the disclosure
Regulations is correct?
A. Posting the required tax forms on the Internet is an
acceptable technique for satisfying the widely available
requirement. B. Forms 990 and 1023 must be readily available to the
general public.
C. If an individual requests a copy of the required tax forms in
writing, the exempt entity must provide a copy
within 30 days.
D. Only a. and b. are correct.
E. a., b., and c. are all correct.
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89. To maintain exempt status, an organization must do which of
the following:
A. Satisfy only an organizational test.
B. Satisfy only an operational test.
C. Satisfy both an organizational test and an operational
test.
D. Satisfy a financial test.
E. Once exempt status is granted, it will continue regardless of
whether the organizational test and the
operational test are satisfied.
90. Give an example of the indicated types of exempt
organizations.
1. 501(c)(3) organization Salvation Army. ____
2. Not an exempt organization League of Women Voters. ____
3. 501(c)(6) business league Teachers association. ____ 4.
501(c)(4) civic league American Plywood Association. ____
5. 501(c)(5) labor organization Six Flags over Texas theme park.
____
91. Match the following statements with the correct
description.
1. University of
Virginia May not be subject to Federal income tax. ____
2. 501(h)
Carries on a trade or business for the benefit of an
exempt organization and remits its profits to the exempt
organization. ____
3. Feeder
organization Exempt organization under 501(c)(3). ____
4. Exempt
organization Exempt organization under 501(c)(7). ____
5. Kentwood
Rodeo Club Permits limited lobbying activities. ____
92. For each of the following taxes which are imposed on private
foundations, match the appropriate initial tax
or additional tax.
1. Tax on self-dealing
5% initial tax and 200% additional tax on the
disqualified person. ____
2. Tax on taxable
expenditures
15% initial tax and 100% additional tax on
private foundation. ____
3. Tax on jeopardizing
investments
5% initial tax and 200% additional tax on
private foundation. ____
4. Tax on excess
business holdings
5% initial tax and 25% additional tax on private
foundation. ____
5. Tax on failure to
distribute
100% additional tax on private foundation and
50% additional tax on foundation manager. ____
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93. Match the following statements.
1. 501(h)
election
May be subject to some Federal income taxation and
classification may adversely affect amount of charitable
contributions received. ____
2. Tax on excess
business holdings
Carries on a trade or business for the benefit of an
exempt organization, remits its profits to the exempt
organization, and is not exempt from Federal income
tax. ____
3. Feeder
organization
Enables certain exempt organizations to engage in
lobbying activities on a limited basis. ____
4. Private
foundation
Tax imposed for engaging in transactions with
disqualified persons. ____
5. Tax on
self-dealing
Tax imposed on investments that enable a private
foundation to control unrelated businesses. ____
94. Match the following statements.
1. The trade or business is not substantially
related to the exempt purpose of the
organization.
Exempt organization may
be subject to the tax on
unrelated business income. ____
2. Unrelated business income is generally that
derived from the unrelated trade or business,
reduced by the deductions directly connected
with the conduct of the unrelated trade or
business.
Exempt from tax on
unrelated business. ____
3. The trade or business consists of selling
merchandise, and substantially all of the
merchandise has been received as gifts or
contributions. Appropriate definition. ____
4. Debt-financed income is the net income
from debt financed property. Inappropriate definition. ____
5. Form 990.
Annual information return
of an exempt organization
which is not a private
foundation. ____
6. Form 990-PF.
Annual information return
of a private foundation. ____
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95. Match the following tax forms.
1. Form 1024 Return of Organization Exempt from Income Tax.
____
2. Form 2758 Return of Private Foundation. ____
3. Form 1023
Application for Recognition of Exemption under
501(c)(3). ____
4. Form 990
Application for Recognition of Exemption under
501(a). ____
5. Form 4720 Application for Extension of Time. ____
6. Form
990-PF
Return of Certain Excise Taxes on Charities and Other
Persons. ____
96. Match the following statements.
1. Low cost
articles
Is considered an unrelated trade or business if can be
conducted by commercial (for-profit) entities. ____
2. Membership
lists
Is considered an unrelated trade or business if the
amount received is contingent upon the level of
attendance at one or more events, broadcast ratings, or
other factors indicating the degree of public exposure to
one or more events. ____
3. Corporate
sponsorship
payments
Distribution of such items is not considered an
unrelated trade or business if the value does not exceed
$10.20 in 2013. ____
4. Bingo games
A trade or business that consists of either renting or
exchanging these with another exempt organization is
not an unrelated trade or business. ____
97. Miracle, Inc., is a 501(c)(3) organization involved in
medical research. Based on its expectation that
proposed legislation will adversely affect the funding
supporting its mission, Miracle hires a lobbyist to work in
Washington to represent its views.
Miracle is eligible for and thus makes the 501(h) election. It
calculates the lobbying nontaxable amount to be
$100,000 ($500,000 exempt purpose expenditures 20%). The total
lobbying expenditures for the year were
$115,000. Calculate Miracles tax on excess lobbying
expenditures.
-
98. Help, Inc., a tax-exempt organization, incurs lobbying
expenses of $275,000 during the tax year. Help is
eligible for and makes the 501(h) lobbying expenditure election.
During the year, Help spends $1,200,000
carrying out its exempt mission.
a. Will the lobbying expense result in Help losing its exempt
status?
b. Calculate the amount of any tax that Help must pay associated
with its lobbying expenses.
99. Restful, Inc., a 501(c)(3) exempt organization, hires a
registered lobbyist to promote its position on
pending legislation. For the year, its lobbying expenses are
$100,000. Restful makes the 501(h) election.
Assume the lobbying nontaxable amount is $90,000.
a. Will the lobbying expenses result in Restful losing its
exempt status?
b. Calculate the amount of any tax that Restful must pay
associated with the lobbying expenses.
100. Medical, Inc., a 501(c)(3) exempt organization, engages in
an excess benefit transaction. The amount of
the excess benefit is $50,000. For the organization management,
the participation in the excess benefit
transaction was not willful and was due to reasonable cause.
Calculate the amount of the excise tax (first-level
tax) imposed under the intermediate sanctions provision.
-
101. All of the stock of Hot Dog, Inc., a fast food franchise
operating in 9 southeastern states, is owned by
Welcome America, Inc., a 501(c)(3) organization. The stock was
received last year as an inheritance from
Rob, the entrepreneur who founded the chain.
During the current year, Hot Dog reports profits before taxes
(this is the same as taxable income) of $8 million.
Hot Dog distributes $5 million to its parent, and it retains the
balance for expansion purposes.
a. What are the tax consequences to Hot Dog and to Welcome
America?
b. How would your answer in a. change if Hot Dog distributes $8
million to Welcome America, rather than
$5 million?
102. Assist, Inc., a 501(c)(3) organization, receives the
following sources of support during the tax year.
General public for services rendered $22,000
Governmental unit A for services rendered 30,000
Governmental unit B for services rendered 3,000
Governmental unit C for services rendered 8,000
Gross investment income 19,000
Contributions from individual substantial contributors
(disqualified persons) 18,000
Is Assist, Inc., classified as a private foundation?
-
103. Spirit, Inc., a 501(c)(3) organization, is classified as a
private foundation. It has investment income of
$175,000. Calculate Spirits tax on its investment income.
104. Orange, Inc., a private foundation, engages in a
transaction with a disqualified person in the amount of
$800,000. Calculate the tax on self-dealing. Assume that
corrective action is taken so that the additional tax
does not apply.
105. Well, Inc., a private foundation, makes a speculative
investment of $400,000 that puts the foundation
assets at risk. Calculate the tax on jeopardizing investments.
Assume that corrective action is taken so that the
additional tax does not apply.
-
106. Wonder, Inc., a 501(c)(3) exempt organization, acquired all
the stock of a for-profit corporation for
$100,000. Wonder is a private foundation. The acquired
corporation was not a related business. Calculate the
tax on excess business holdings. Assume that corrective action
is taken so that the additional tax does not
apply.
107. Warmth, Inc., a private foundation, makes an expenditure of
$800,000 that should not be made by a private
foundation. Calculate the tax on taxable expenditures. Assume
that corrective action is taken so that the
additional tax does not apply.
108. First Americans, Inc., a 501(c)(3) organization, operates a
museum which depicts the lives of a tribe of
Native Americans. It charges an admission fee, but also finances
its operations through endowment income,
contributions, and gift shop sales. The gift shop is operated by
50 volunteers and the museum is operated by 15
employees. Revenue by source is:
Admission fees $700,000
Endowment income 75,000
Gift shop net income 300,000
Contributions 100,000
a. Determine the amount of First Americans unrelated business
income.
b. Determine the amount of First Americans unrelated business
income tax (UBIT).
-
109. Radio, Inc., an exempt organization, trains disabled
individuals to be radio announcers. Rather than hold a
traditional graduation exercise, the graduates compete in a
radio announcer contest. Such activities are held four
times each year. An admission fee of $10 is charged to the
general public to attend the contest. Eight hundred
people attended the contest this year, and prizes of $2,000 were
given to the top 3 graduates. Calculate the
amount of Radios unrelated business income from this
activity.
110. The Dispensary is a pharmacy that is part of a 501(c)(3)
hospital. Its primary mission is to dispense
medicines for hospital patients. In addition, the pharmacy
dispenses medicines to former hospital patients for a
period of up to 30 days after discharge from the hospital. It
does this for the dual purpose of convenience to the
former patients (i.e., the closest pharmacy is 6 miles away),
and to ensure that the former patients receive the
medicines that have been prescribed for them.
The Dispensary carefully carries out the policy of the hospital
board that no more than 25% of its gross
revenues come from former-patient medicine sales. If necessary,
in December of each year, sales to former
patients are curtailed to assure compliance with this policy.
Sales revenue from each of the two sources is as
follows for 2013.
Medicine dispensed to hospital patients $900,000
Medicine sales to former patients 100,000
Calculate the amount of The Dispensarys unrelated business gross
income.
-
111. Midnight Basketball, Inc., an exempt organization that
organizes and conducts basketball games for youths
ages 10-13, receives a $20,000 contribution from Brown Shoe
Company. Midnight agrees to put Browns logo on the cover of its
monthly newsletter.
a. Is the contribution unrelated business income to
Midnight?
b. Assume that instead of putting Browns logo on the cover of
its newsletter, Midnight agrees to include a statement in the
newsletter that youth playing in the games conducted by Midnight
wear only shoes manufactured by Brown. Is the contribution
unrelated business income
to Midnight?
c. Would your answer in b. change if the amount of the payment
was $7,500 instead of $20,000?
112. Faith Church, a 501(c)(3) organization, operates a bingo
game two times each week to raise money to
support the youth activities of the church. For the current
year, net proceeds from the bingo game are $900,000.
a. Determine the tax consequences for Faith Church if the bingo
game is conducted in a state where for-profit bingo games are
illegal, and
where the bingo game is legal for exempt entities.
b. Determine the tax consequences for Faith Church if the bingo
game is conducted in a state and locality where bingo games are
legal for
both for-profit and exempt entities.
-
113. Watch, Inc., a 501(c)(3) exempt organization, solicits
contributions through a mail campaign. An
executive, who recently completed an executive MBA degree
program, recommends that personal address
labels be included as an additional way to motivate the
potential donor to contribute. The value of these labels is
$10.20 per potential donor. What is the effect of the inclusion
of the address labels on Watchs unrelated business income?
114. Ice, Inc., a 501(c)(3) organization, has been leasing a
building to Soft, Inc., a taxable entity, for 15 years.
The lease terminates in the current tax year. Ices adjusted
basis for the building is $225,000. It sells the building to the
Development Partnership, a taxable entity, for $440,000. Selling
expenses are $26,400.
a. Calculate the effect of the sale on Ices UBTI.
b. Assume instead that Development Partnership is a tax-exempt
entity. Calculate the effect of the sale on Ices UBTI.
115. Amber, Inc., an exempt organization, reports unrelated
business taxable income of $300,000. Total
charitable contributions are $35,000, of which $31,000
(associated with the unrelated trade or business) has
been deducted in calculating net unrelated business income.
Calculate Ambers positive and negative adjustments in calculating
unrelated business taxable income.
-
116. City, Inc., an exempt organization, has included among
other amounts the following in calculating net
unrelated business income of $500,000.
Dividend income $12,000
Interest income 6,000
Royalty income 15,000
Rent income from equipment 25,000
The only expenses incurred associated with these items are
rental expenses (which includes depreciation of $10,000) of
$15,000. Calculate City,
Inc.s UBTI.
117. Arbor, Inc., an exempt organization, leases land, building,
and machinery to a tenant for a 5-year period.
The rent income for the land and building is $400,000 per year
and that from the related machinery is $80,000
per year. Expenses incurred by Arbor for the land and building
during the year are $60,000 and those for the
machinery are $36,000. Net unrelated business income, which
includes the above rental income and expenses,
is $800,000. Calculate Arbors unrelated business taxable
income.
118. Pearl Inc., a tax-exempt organization, leases land,
building, and machinery to Purple Partnership for a
5-year period. The rental income from the land and building is
$100,000, with related expenses of $40,000. The
rental income from the machinery is $9,000, with related
expenses of $3,000. What adjustment must be made to
net unrelated business income?
-
119. An exempt organization owns a building for which its
adjusted basis is $100,000 at the beginning of the
year and $90,000 at the end of the year. One-half of the ground
floor is leased to a commercial venture for
$10,000 per year. The remainder of the first floor and all of
the second floor are used by the exempt
organization in carrying out its mission. When the exempt
organization constructed the building 20 years ago, it
incurred a mortgage of $150,000. The final payment of this
mortgage was made in December of the current
year. The average acquisition indebtedness for the current year
is $30,000. Determine to what extent the
building is debt-financed property, the amount of debt-financed
income, and the portion of debt-financed
income that is treated as unrelated business income.
120. Hope, Inc., an exempt organization, owns a factory building
that it leases to a taxable corporation for
$100,000 per year. Related expenses for Hope are $30,000. Hopes
average acquisition indebtedness on the building is $400,000 and
the average adjusted basis is $600,000. Calculate Hopes unrelated
debt-financed income and expenses. Then indicate the effect of
these items on unrelated business taxable income.
121. Why are some organizations exempt from Federal income
tax?
-
122. Are organizations that qualify for exempt organization
status completely exempt from Federal income
taxation?
123. Under what part of 501(c) are most organizations exempt
from Federal income taxation?
124. What are the common characteristics of organizations that
receive exempt status?
125. Discuss benefits for which an exempt organization may be
eligible, other than exemption from Federal
income tax.
-
126. Are some exempt organizations eligible to be recipients of
contributions for which the donor does not
qualify for a charitable contribution deduction?
127. Discuss the relationship between the qualification
requirements for exempt status and the maintenance
requirements.
128. Describe how an exempt organization can be eligible to make
lobbying expenditures without losing its tax
exemption.
129. An eligible 501(c)(3) organization has made the 501(h)
election to participate in lobbying on a limited
basis. If the ceiling on lobbying established in 501(h)
(lobbying nontaxable amount) is exceeded, what are
the potential tax consequences to the exempt organization?
-
130. What are intermediate sanctions and to what types of exempt
organizations do they apply?
131. Loyal, Inc., is a 501(c)(3) organization that is not
classified as a private foundation. During the current
year, it is subject to intermediate sanctions. What other
options does the IRS have in dealing with an exempt
organization engaging in prohibited transactions?
132. Francis is the CEO of Give, Inc., a 501(c)(3) organization.
Francis informs you that the will of a major
donor transfers 100% of the stock of Friendly Hot Dogs to Give,
Inc. Since Friendly is a profitable entity,
Francis would like for Give to continue to own and operate
Friendly Hot Dogs. You inform Francis that
Friendly would be a feeder organization. Describe for the CEO
what a feeder organization is and how it is
taxed.
133. Support the Pets, Inc., a 501(c)(3) organization, provides
pet food to humane societies. All of the pet
food is received as contributions from individuals or from a
wholly-owned, for-profit subsidiary (Sales, Inc.),
which is in the retail pet food business (i.e., pet food that
has been in inventory for over 120 days is transferred
to Support the Pets for distributions to humane societies). In
addition to the pet food, Sales distributes 75% of
its net income each year to Support the Pets.
a. Is Support the Pets or Sales, Inc., a feeder
organization?
b. How would your answer change if nearly all of the work of
Support the Pets was done by volunteers?
-
134. Agnes is aware that a feeder organization is subject to
Federal income taxation. She wonders whether an
organization otherwise taxable as a feeder organization can
avoid such status if it remits less than 80% of its
profits to the 501(c)(3) entity.
135. What income and activities are not subject to the feeder
organization rules?
136. Define a private foundation.
-
137. How can an exempt organization, otherwise classified as a
private foundation, avoid private foundation
status?
138. What is the purpose of the broadly supported exception for
an exempt organization being classified as a private
foundation?
139. Discuss any negative tax consequences that result from an
exempt organization being classified as a
private foundation.
140. What are the excise taxes imposed on private foundations,
and why are they imposed?
-
141. Identify the components of the tax model for unrelated
business taxable income.
142. What is the purpose of the unrelated business income
tax?
143. Plus, Inc., is a 501(c)(3) organization. It generates a
small amount of net income each year. Ralph, the
CEO of Plus, Inc., is concerned that Plus may be subject to the
unrelated business income tax. Is there a
materiality exception to this tax?
144. Which requirements must be satisfied for an exempt
organization to be classified as an unrelated trade or
business? Is being classified as an unrelated trade or business
good or bad?
-
145. Define trade or business for purposes of the unrelated
business income tax (UBIT).
146. In what types of organizations does the UBIT apply?
147. One of the requirements for an exempt organization being
classified as an unrelated trade or business is the
not substantially related requirement. That is, the trade or
business is not substantially related to the exempt purpose of the
organization. How can an exempt organization avoid satisfying this
requirement?
148. Define a qualified corporate sponsorship payment.
-
149. Under what circumstances are bingo games not treated as an
unrelated trade or business?
150. If an exempt organization distributes low-cost items as an
incidental part of its solicitation for charitable contributions,
the distribution is not considered an unrelated trade or
business.
a. Define a low-cost item for tax year 2013.
b. Provide examples of low-cost items.
151. A 501(c)(3) organization exchanges its membership lists
with another exempt organization. What are the
Federal income tax consequences?
-
152. Robin, Inc., an exempt organization, acquired a building
for $400,000 which it will lease to ABC, Inc., for
$40,000 annually. To finance the acquisition of the building,
Robin secures a mortgage on it of $250,000.
Advise Robin as to whether it has any unrelated debt-financed
income or deductions.
153. Define average acquisition indebtedness with respect to
debt-financed property.
154. What tax forms are used to apply for exempt status?
155. If an exempt organization is required to file an annual
information return, on what form is it filed?
-
156. Which exempt organizations are not required to file an
annual Federal tax return?
-
COMPREHENSIVE VOLUME--CHAPTER 23--EXEMPT
ENTITIES Key
1. TRUE
2. TRUE
3. FALSE
4. FALSE
5. FALSE
6. TRUE
7. FALSE
8. FALSE
9. FALSE
10. FALSE
11. FALSE
12. FALSE
13. FALSE
14. FALSE
15. FALSE
16. FALSE
17. TRUE
18. FALSE
19. FALSE
20. TRUE
21. TRUE
22. FALSE
23. TRUE
24. FALSE
25. FALSE
26. FALSE
27. TRUE
28. FALSE
-
29. FALSE
30. FALSE
31. FALSE
32. TRUE
33. TRUE
34. FALSE
35. FALSE
36. FALSE
37. TRUE
38. FALSE
39. FALSE
40. FALSE
41. FALSE
42. FALSE
43. FALSE
44. FALSE
45. FALSE
46. TRUE
47. FALSE
48. FALSE
49. FALSE
50. TRUE
51. E
52. E
53. D
54. D
55. E
56. B
57. E
58. E
59. C
60. E
61. D
62. C
-
63. E
64. D
65. E
66. D
67. E
68. D
69. D
70. C
71. D
72. A
73. D
74. A
75. D
76. C
77. E
78. D
79. B
80. C
81. B
82. B
83. A
84. B
85. E
86. D
87. E
88. E
89. C
90. 501(c)(3) organization :: Salvation Army. and 501(c)(4)
civic league :: League of Women Voters. and 501(c)(5) labor
organization :: Teachers association. and 501(c)(6) business
league :: American Plywood Association. and Not an exempt
organization :: Six Flags over Texas theme park.
91. Exempt organization :: May not be subject to Federal income
tax. and Feeder organization :: Carries on a trade or business for
the benefit of an
exempt organization and remits its profits to the exempt
organization. and University of Virginia :: Exempt organization
under
501(c)(3). and Kentwood Rodeo Club :: Exempt organization under
501(c)(7). and 501(h) :: Permits limited lobbying activities.
92. Tax on self-dealing :: 5% initial tax and 200% additional
tax on the disqualified person. and Tax on failure to distribute ::
15% initial tax and
100% additional tax on private foundation. and Tax on excess
business holdings :: 5% initial tax and 200% additional tax on
private
foundation. and Tax on jeopardizing investments :: 5% initial
tax and 25% additional tax on private foundation. and Tax on
taxable
expenditures :: 100% additional tax on private foundation and
50% additional tax on foundation manager.
-
93. Private foundation :: May be subject to some Federal income
taxation and classification may adversely affect amount of
charitable contributions
received. and Feeder organization :: Carries on a trade or
business for the benefit of an exempt organization, remits its
profits to the exempt
organization, and is not exempt from Federal income tax. and
501(h) election :: Enables certain exempt organizations to engage
in lobbying
activities on a limited basis. and Tax on self-dealing :: Tax
imposed for engaging in transactions with disqualified persons. and
Tax on excess
business holdings :: Tax imposed on investments that enable a
private foundation to control unrelated businesses.
94. The trade or business is not substantially related to the
exempt purpose of the organization. :: Exempt organization may be
subject to the tax on
unrelated business income. and The trade or business consists of
selling merchandise, and substantially all of the merchandise has
been received as
gifts or contributions. :: Exempt from tax on unrelated
business. and Unrelated business income is generally that derived
from the unrelated trade or
business, reduced by the deductions directly connected with the
conduct of the unrelated trade or business. :: Appropriate
definition. and Debt-financed income is the net income from debt
financed property. :: Inappropriate definition. and Form 990. ::
Annual
information return of an exempt organization which is not a
private foundation. and Form 990-PF. :: Annual information return
of a private
foundation.
95. Form 990 :: Return of Organization Exempt from Income Tax.
and Form 990-PF :: Return of Private Foundation. and Form
1023 :: Application for Recognition of Exemption under
501(c)(3). and Form 1024 :: Application for Recognition of
Exemption under
501(a). and Form 2758 :: Application for Extension of Time. and
Form 4720 :: Return of Certain Excise Taxes on Charities and Other
Persons.
96. Bingo games :: Is considered an unrelated trade or business
if can be conducted by commercial (for-profit) entities. and
Corporate sponsorship
payments :: Is considered an unrelated trade or business if the
amount received is contingent upon the level of attendance at one
or more events,
broadcast ratings, or other factors indicating the degree of
public exposure to one or more events. and Low cost articles ::
Distribution of such items
is not considered an unrelated trade or business if the value
does not exceed $10.20 in 2013. and Membership lists :: A trade or
business that
consists of either renting or exchanging these with another
exempt organization is not an unrelated trade or business.
97. Since Miracles lobbying expenses of $115,000 do not exceed
the ceiling on lobbying expenses of $150,000 ($100,000 1.5), it is
not in danger of forfeiting its exempt status as a result of
incurring the lobbying expenses. The tax on excess lobbying
expenditures is calculated as follows.
Lobbying expenditures $115,000
Lobbying nontaxable amount (100,000)
Excess lobbying expenditures $ 15,000
25% rate 25%
Tax on excess lobbying expenditures $ 3,750
98.
a. No. Help is not in danger of losing its exempt status because
of the lobbying expenses, as it is eligible to and makes the 501(h)
lobbying
expenditure election. In addition, Help does not exceed the
lobbying expenditures ceiling.
150%[$175,000 + 10%($1,200,000 $1,000,000)] = $292,500
Helps lobbying expenses of $275,000 are below the maximum
allowable.
b. Helps tax liability of $20,000 is calculated as follows.
Lobbying expenditures $275,000
Lobbying nontaxable amount
[$175,000 + 10%($1,200,000 $1,000,000)] (195,000) Excess
lobbying expenditures $ 80,000
Statutory rate 25%
Tax on excess lobbying expenditures $ 20,000
-
99.
a. Restful
made the
501(h)
election
to lobby
to a
limited
extent.
The
permitte
d ceiling
on
lobbying
expenses
is
$135,00
0 (150%
$90,000)
. Since
Restfuls lobbying
expenses
of
$100,00
0 do not
exceed
this
amount,
Restfuls exempt
status is
not
jeopardi
zed by
the
lobbying
expendit
ures.
b. Restfuls tax
liability
associate
d with
the
lobbying
expenses
is
calculate
d as
follows.
Lobbyin
g
expenses
$100,000
Lobbyin
g
nontaxa
ble
amount
(90,000)
Excess
lobbying
expenses
$ 10,000
Statutor
y rate
25%
-
Tax on
excess
lobbying
expenses
$ 2,500
100. Under the intermediate sanctions provision, the excise tax
rate of 25% on the disqualified person is applied to the excess
benefit. So the amount
of the tax is $12,500 ($50,000 25%). Based on the facts in this
case, no first-level tax is imposed on the exempt organization
management.
101. a. Hot Dog is a feeder organization. Therefore, it is
subject to Federal income tax on its taxable income of $8 million
using the corporate tax
rates.
8 million 34% = $2.72 million
Since Welcome America is an exempt entity, it is not subject to
Federal income tax on the dividend distribution it receives from
Hot Dog.
b. The tax consequences are the same as in a. However,
distributing all of the profits before taxes could produce some
cash flow problems for Hot
Dog, since it must pay a Federal income tax liability of $2.72
million.
102. To not be classified as a private foundation, Assist must
receive broad public support. To receive broad public support,
Assist must satisfy both
an external support test and an internal support test.
The external support test requires that more than one-third of
Assists support for the taxable year come from the governmental
units and the general public. For this purpose, support from a
governmental unit is counted only to the extent of the greater of
$5,000 or 1% of the total support.
Governmental unit A $ 5,000
Governmental unit B 3,000
Governmental unit C 5,000
General public 22,000
External support $35,000
Since the $35,000 exceeds one-third of the total support of
$100,000, the external support test is satisfied.
The internal support test requires that no more than one-third
of the total support be from gross investment income and unrelated
business taxable
income (net of the related tax). The internal support test also
is satisfied, since $19,000 does not exceed one-third of
$100,000.
Therefore, Assist, Inc., is not classified as a private
foundation because it is broadly supported.
103.
Investment income $175,000
Rate 2%
Tax on its investment income $ 3,500
104. The initial tax on the disqualified person is $40,000
($800,000 5%). The tax is levied on the disqualified person, not on
the private foundation.
The initial tax on the foundation manager would be $20,000
($800,000 2.5%), but is limited to a statutory ceiling of
$10,000.
105. The initial tax on the private foundation is $20,000
($400,000 5%). The initial tax on the foundation manager is $20,000
($400,000 5%), but
limited by statute to $5,000.
106. The initial tax on the private foundation on the excess
business holdings is $5,000 ($100,000 5%). No tax is imposed on the
foundation
manager.
107. The initial tax on the private foundation is $80,000
($800,000 10%). The initial tax on the foundation manager is
$20,000 ($800,000 2.5%),
but limited by statute to $5,000.
108.
a. The only potential source of unrelated business income for
First Americans, Inc., is the gift shop net income of $300,000.
However, since
the individuals performing substantially all the work of the
gift shop do so without compensation (i.e., they are volunteers),
the gift shop
net income of $300,000 is not classified as unrelated business
income. Thus, First Americans, Inc., does not have any unrelated
business
income.
b. Since First Americans has no unrelated business income, its
unrelated business income tax (UBIT) is $0.
-
109. The contest activity is not classified as an unrelated
trade or business for Radio. To be so classified, the following
characteristics must be
present.
The organization conducts a trade or business.
The trade or business is not substantially related to the exempt
purpose of the organization.
The trade or business is regularly carried on by the
organization.
Based on the data provided, neither the not substantially
related nor the regularly carried on characteristic is satisfied.
Thus, Radio has no unrelated business income from the contest,
because the contest is not an unrelated trade or business.
110. For any of the activities of The Dispensary to be
classified as unrelated business income, the three following
requirements must be satisfied.
The organization conducts a trade or business.
The trade or business is not substantially related to the exempt
purpose of the organization.
The trade or business is regularly carried on by the
organization.
All of these conditions are satisfied for the sales by The
Dispensary to former patients. Thus, this part of the pharmacy
activity of the hospital is an
unrelated trade or business and the unrelated business gross
income is $100,000. The 25% policy of the hospital board is not
relevant in classifying
part of the pharmacy as an unrelated trade or business.
111.
a. No. The $20,000 payment is a qualified sponsorship payment.
Thus, it is not unrelated business income to Midnight.
b. Yes. The $20,000 payment does not satisfy the requirements
for a qualified sponsorship payment. Thus, it is unrelated business
income to
Midnight.
c. No. The $7,500 payment does not satisfy the requirements for
a qualified sponsorship payment. Thus, it is unrelated business
income to
Midnight.
-
112.
a. In this
case,
the
$900,
000 is
exem
pt
from
Feder
al
incom
e
taxati
on
becau
se
both
of the
follo
wing
requir
ement
s are
satisfi
ed.
The bingo game is legal under both state and local law.
Commercial bingo games (conducted for a profit motive)
ordinarily are not permitted in the jurisdiction.
b. In this
case,
the
Feder
al
incom
e tax
liabili
ty to
Faith
Churc
h is
$306,
000
($900
,000
34%).
-
Since
comm
ercial
bingo
games
are
permi
tted in
the
jurisdi
ction,
the
proce
eds of
$900,
000
from
the
bingo
game
spons
ored
by
Faith
Churc
h are
subjec
t to
Feder
al
incom
e
taxati
on as
unrela
ted
busin
ess
incom
e.
113. The address labels are low cost articles (permitted indexed
amount for 2013 is $10.20). There is no effect on Watchs unrelated
business income, since the distribution of the address labels is
not considered to be an unrelated trade or business.
114.
a. Amount realized ($440,000 $26,400) $413,600 Adjusted basis
(225,000)
Realized gain $188,600
Recognized gain (UBI) $ 0
None of the realized gain of $188,600 is unrelated business
income.
b. The answer would be the same as in a. above.
115. Since the $31,000 has been deducted in calculating net
unrelated business income, there is no excess [$31,000 10%($331,000
unrelated business income without the charitable contribution
deduction)] to be treated as a positive adjustment in calculating
unrelated business taxable
income. The charitable contributions of $4,000 not associated
with the unrelated trade or business constitutes a negative
adjustment of $2,100
[10%($331,000) $31,000].
-
116.
Net unrelated business income $500,000
Negative adjustments:
Dividend income (12,000)
Interest income (6,000)
Royalty income (15,000)
Unrelated business taxable income $467,000
The net rental income from the equipment ($25,000 $15,000 =
$10,000) is not a negative adjustment.
117.
Net unrelated business income $800,000
Net rent income from land and building ($400,000 $60,000)
(340,000) Unrelated business taxable income $460,000
The net rent income from the land and building is a negative
adjustment. The net rent income from the machinery does not qualify
as a negative
adjustment because it is not incidental (i.e., $80,000 gross
rental income is greater than 10% of $480,000 total gross rental
income).
118. The net rental income of $66,000 ($60,000 + $6,000) from
the land and building ($100,000 $40,000) and the machinery ($9,000
$3,000) is not included in calculating unrelated business taxable
income. The personal property (machinery) is leased with the real
property (land and building),
and the personal property rental income ($9,000) is not greater
than 10% of the total gross rental income of $109,000 ($100,000 +
$9,000) under the
lease.
119. The building is not classified as debt-financed property if
substantially all (at least 85%) of the use is for the achievement
of the exempt purpose
of the exempt organization. Since only 75% of the buildings
usage satisfies this requirement, 25% of the building is classified
as debt-financed property.
The debt/basis percentage is calculated as follows.
*($100,000 + $90,000) 2
The amount of debt-financed income is the lease income of
$10,000. Of this amount, $3,160 ($10,000 31.6%) is treated as
unrelated business
income.
120. The income from the factory building is debt-financed
income, since the building is debt-financed property. The
debt/basis percentage is
calculated as follows.
The debt-financed income is $66,667 ($100,000 2/3), and the
debt-financed expenses are $20,000 ($30,000 2/3). The net
debt-financed income of
$46,667 ($66,667 $20,000) increases unrelated business taxable
income.
121. The Codes treatment of exempt organizations is based on a
variety of objectives. While the major objective is to raise
revenue, social, economic, and political objectives also are
present. Social objectives are served by the provision of exempt
status for organizations who serve the
general welfare, and by so doing, may reduce the financial
burden required of the Federal government.
122. No. Such organizations may be only partially exempt from
Federal income tax. First, if the exempt organization engages in a
prohibited
transaction, it is subject to tax. Second, if the organization
is a feeder organization, it is subject to tax. Third, private
foundations are subject to
certain excise taxes. Fourth, an exempt organization is subject
to tax on its unrelated business taxable income.
123. Most organizations that are exempt from Federal income tax
qualify for exempt status under 501(c)(3). Among the types of
organizations
exempt under 501(c)(3) are religious, charitable, educational,
scientific, and literary organizations. Examples include the Boy
Scouts of America,
Red Cross, Salvation Army, Episcopal Church, United Fund, and
the University of Richmond.
-
124. Many organizations that qualify for exempt status share the
following characteristics.
The organization serves some type of common goal.
The organization is not a for-profit entity.
Net earnings of the organization do not benefit the members of
the organization.
The organization does not exert political influence.
125. In addition to being exempt from Federal income tax, an
exempt organization may be eligible for the following benefits.
Exemption from state income tax, state franchise tax, sales tax,
and property tax.
Receive discounts on postage rates.
Donors of property to the exempt organization may qualify for
charitable contribution deductions on their Federal or state income
tax
returns.
126. Yes. For example, contributions to the National Football
League, PGA Tour, and Underwriters Laboratories cannot be deducted
by the donors
as charitable contributions.
127. A potentially exempt organization initially must satisfy
certain qualification requirements in order to achieve exempt
status. These qualification
requirements then become maintenance requirements (i.e., in
order to continue to be exempt).
128. Certain exempt organizations are permitted to lobby on a
limited basis by making the 501(h) election. Such lobbying expenses
are subject to a
ceiling. Exceeding the ceiling can lead to the forfeiture of
exempt status. Churches, their integrated auxiliaries, and private
foundations are not
eligible to make the 501(h) election. Instead, no substantial
part of the organizations activities can include lobbying.
129. First, a tax is levied on the excess lobbying expenditures.
Second, such excess lobbying expenditures could result in
revocation of exempt status
by the IRS.
130. Intermediate sanctions apply to so-called public charities
(i.e., not to private foundations). They are excise taxes imposed
on disqualified persons
(i.e., any individuals who are in a position to exercise
substantial influence over the affairs of the exempt organization)
who engage in excess benefit
transactions, and on exempt organization managers who
participate in such a transaction knowing that it is improper.
Intermediate sanctions provide
the IRS with another option in dealing with such exempt
organizations who engage in prohibited transactions. Prior to the
legislative enactment of
intermediate sanctions, the IRS had only the following two
options.
Attempt to subject part or all of the exempt organizations
income to Federal income tax.
Revoke the exempt status of the organization.
131. The IRS has two other options available for dealing with an
exempt organization engaging in prohibited transactions. First, the
IRS could
attempt to subject part or all of the organizations income to
Federal income tax. Second, it could revoke the exempt status of
the organization.
132. A feeder organization is a taxable entity that carries on a
trade or business for the benefit of an exempt organization and
remits its profits to the
exempt organization. A feeder organization is taxed using the
corporate tax rates.
133.
a. Sales, Inc., is a feeder organization. So, it is subject to
the corporate income tax on its taxable income.
b. The answer would not change. Since Sales, Inc., is a
for-profit entity, it is subject to the corporate income tax.
134. No. While a feeder organization carries on a trade or
business for the benefit of an exempt organization and remits its
profits to the exempt
organization, there is no statutory percentage with respect to
the percentage of its profits which it remits each year. For
example, for a particular tax
year part of the profits may be invested in the growth of the
feeder organization (e.g., working capital, new branch) rather than
being remitted to the
exempt organization.
-
135. The following income and activities are not subject to the
feeder organization rules.
Rent income that would be excluded from the definition of the
term rent for purposes of the unrelated business income tax.
A trade or business where substantially all the work is
performed by volunteers.
The trade or business of selling merchandise where substantially
all the merchandise has been received as contributions or
gifts.
136. The following 501(c)(3) organizations are not private
foundations.
a. Churches; educational institutions; hospitals and medical
research organizations; charitable organizations receiving a major
portion of their
support from the general public or the United States, a state,
or a political subdivision thereof that is operated for the benefit
of a college or
university; and governmental units (favored activities
category).
b. Organizations that are broadly supported by the general
public (excluding disqualified persons), by governmental units, or
by
organizations described in (a) above.
c. Entities organized and operated exclusively for the benefit
of organizations described in (a) or (b) [a supporting
organization].
d. Entities organized and operated exclusively for testing for
public safety.
137. An exempt organization that otherwise would be classified
as a private foundation can avoid private foundation status if it
receives broad public
support. To meet the broadly supported requirement, the exempt
organization must satisfy both an external support test and an
internal support test.
138. The intent of the external support test and the internal
support test is to exclude from private foundation status those
501(c)(3) organizations
that are responsive to the general public rather than to the
private interests of a limited number of donors of other
persons.
139. Two potential negative tax consequences can result from an
exempt organization being classified as a private foundation.
First, the classification
may have an adverse impact on the amount of contributions
received by the donee exempt organization. This occurs because the
tax consequences
for donors may not be as favorable as those for entities not
classified as private foundations. Second, the classification may
result in certain excise
taxes being imposed on the exempt organization.
140. The excise taxes imposed on private foundations include the
following.
Tax based on investment income.
Tax on self-dealing.
Tax on failure to distribute income.
Tax on excess business holdings.
Tax on investments that jeopardize charitable purposes.
Tax on taxable expenditures.
The tax based on investment income effectively is an audit fee,
where the chief purpose is to defray IRS expenses. The other taxes
restrict the
permitted activities of private foundations. By its nature, a
private foundation envisions a more narrow definition of the common
good (and therefore
less broad public support) than other exempt organization.
141. The tax model for unrelated business taxable income is as
follows.
Gross unrelated business income
Deductions = Net unrelated business income
+ Modifications
= Unrelated business taxable income
142. The unrelated business income tax is designed to treat the
exempt entity as if it were subject to the corporate income tax
with respect to its
unrelated business income. Without such a tax, nonexempt
organizations (regular taxable business entities) would be at a
substantial disadvantage
when trying to compete with the exempt organization. Thus, the
UBIT is intended to neutralize the exempt entitys tax
advantage.
143. Yes. The materiality exception generally exempts an exempt
entity from being subject to the UBIT if such income is
insignificant (i.e., not over
$1,000).
-
144. If the following requirements are satisfied, an exempt
organization is classified as an unrelated trade or business.
The organization conducts a trade or business.
The trade or business is not substantially related to the exempt
purpose of the organization.
The trade or business is regularly carried on by the
organization.
An exempt organization usually would prefer not to operate an
unrelated trade or business, since doing so results in the
imposition of the Federal
income tax.
145. Trade or business, for purposes of the UBIT, is broadly
defined. It includes any activity conducted for the production of
income through the sale
of merchandise or the performance of services. An activity need
not generate a profit to be treated as a trade or business. The
activity may be part of a
larger set of activities conducted by the organization, some of
which may be related to the exempt purpose. Being included in a
larger set does not
cause the activity to lose its identity as an unrelated trade or
business.
146. The UBIT applies to all organizations that are exempt from
Federal income tax under 501(c), except for Federal agencies.
147. To avoid satisfying this requirement, the trade or business
of the exempt organization must be related to its exempt purpose.
To be related to the
accomplishment of the exempt purpose, the conduct of the
business activities must be causally related and contribute
importantly to the exempt
purpose.
148. A payment qualifies as a qualified sponsorship payment if
it meets the following requirements.
There is no arrangement or expectation that the trade or
business making the payment will receive any substantial benefit
other than
the use or acknowledgement of its name, logo, or product lines
in connection with the activities of the exempt organization.
Such use or acknowledgment does not include advertising the
payors products or services.
The payment does not include any payment for which the amount is
contingent upon the level of attendance at one or more events,
broadcast ratings, or other factors indicating the degree of
public exposure to one or more events.
149. A bingo game is not an unrelated trade or business for
purposes of the UBIT if the following requirements are
satisfied.
The bingo game is legal under both state and local law.
Commercial bingo games (conducted for a profit motive) are not
permitted in the jurisdiction.
150.
a. For 2013, a low-cost item is one that costs $10.20 (indexed
annually) or less.
b. Examples of low-cost items are pens, stamps, stickers,
stationary, and address labels.
151. If an exempt organization conducts a trade or business that
consists of either exchanging with or renting to other exempt
organizations the
organizations donor or membership list, the activity is not an
unrelated trade or business.
152. The building is appropriately classified as debt-financed
property. Therefore, Robin, Inc, calculates the debt/basis
percentage as follows.
Once the debt/basis percentage for the year is calculated, it is
multiplied by the lease rental income of $40,000 and the related
deductions including
depreciation. The resulting amounts constitute the unrelated
debt financed income and deductions.
153. Average acquisition indebtedness is the average amount of
the outstanding debt for the taxable year (ignoring interest)
during the portion of the
year the property is held by the exempt organization. This
amount is calculated by summing the outstanding debt on the first
day of each calendar
month the property is held by the exempt organization, and
dividing this amount by the number of months the property is held
by the exempt
organization.
-
154. An organization that is exempt under 501(c)(3) uses Form
1023 [Application for Recognition of Exemption Under 501(c)(3)] to
apply. Form
1024 [Application for Recognition of Exemption Under 501(a)] is
used by most other types of exempt organizations.
155. Exempt organizations that are not private foundations file
Form 990 (Return of Organization Exempt from Income Tax). Forms
990-N and
990-EZ might be available. Private foundations file Form 990-PF
(Return of Private Foundation).
156. The following exempt organizations need not file form
990.
Federal agencies.
Churches.
Private foundations file a Form 990-PF (Return of Private
Foundation). Smaller entities may qualify to file a Form 990-N or
990-EZ.