ch23

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

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

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

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

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

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

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.

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.

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.


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.


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.

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.


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.

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.


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.


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.

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.

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.


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.

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.


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.


E. a., b., and c. are all correct.

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. ____

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. ____


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. ____

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. ____


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.




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.




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.

ch23

Documents

Transcript of ch23