Exam 2

Question 1

Corporate Income Tax

Answer 1

paid on profit, the amount of money paid after expenses

Question 2

Unprofitable Business

Answer 2

If you don’t make a profit, you don’t pay income taxes, functionally tax-exempt

Question 3

Untaxed profit goes to

Answer 3

Expand - programs, products, and services
Invest - in infrastructure improvements, human capital, hiring the best people
Save - for future risks and opportunities

Question 4

Why Governments allow for tax-exemption

Answer 4

Government expects nonprofits to do more good with that extra money, reach more people, accomplish their missions without the burden of tax

Question 5

501(c)3

Answer 5

tax exempt, contributions are deductible, insubstantial lobbying, no political campaigns

Question 6

501(c)4

Answer 6

tax-exempt, no deductions, lots of lobbying, political campaigning (SuperPACS) don’t have to disclose where they get money

Question 7

501(c)6

Answer 7

tax-exempt, no deductions, allowed to lobby, allowed to campaign, industries, trade associations

Question 8

Donations

Answer 8

Not a normal good, price-inelastic, income-elastic

Question 9

Price-inelastic

Answer 9

As cost of donations go down, consumption stays the same

Question 10

Income-elastic

Answer 10

As income goes up, consumption goes up (people donate more)

Question 11

Inferior policy

Answer 11

donations are not treated equally, gives preferential treatment to wealthy, home-owners and residents of high tax citities. Regressive tax policy

Question 12

Organizational Test

Answer 12

What you say

Question 13

Organizational Test - Dissolution Clause

Answer 13

If charity is dissolved, funds go back to the community or other charitable organizations

Question 14

Organizational Test

Inurement Clause

Answer 14

No private benefit

Question 15

Organizational Test

Purpose Clause

Answer 15

limited to charitable activity

Question 16

Organizational Test

Political Activity

Answer 16

insubstantial lobbying, no campaigning

Question 17

Operational Test

Answer 17

what you do

Question 18

Operational Test

Charitable Class

Answer 18

charitable cause, no specific people (no GoFundMe’s)

Question 19

Operational Test

Commensurate Test

Answer 19

spend money the way you should (don’t spend it all in one place, i.e fundraising)

Question 20

Operational Test

Business Activities

Answer 20

UBI (unrelated business income) is insignificant, income earned is for a charitable purpose

Question 21

Public Charities

Answer 21

1/2 of support comes from the public, inherently public activity (church, school, hospital) Expenditures charitable purpose, no excise taxes, lower private benefit

Question 22

Supporting Organizations

Answer 22

mission to support a public charity, activities are limited, organizational test required, in support of a public charity, no excise taxes, lower private benefit

Question 23

Private Foundations

Answer 23

charitable vehicle for families and companies that give money to others, 5% of assets given away per year, Excise tax of 2%, higher self-dealing limits

Question 24

Private Operating foundations

Answer 24

Private foundations that do charitable activity, stated mission of a few donors, 3.33% of assets, 2 % of investment income, higher self-dealing

Question 25

Private Benefit

Answer 25

Codes says “operated exclusively” for a charitable purpose, insubstantial activity - IRS doesn’t define substantiality, benefits not charity count as private benefit

Question 26

Private Inurement

Answer 26

considered in the context of insiders, “Is there a way that the organization’s profits are guaranteed to go to an individual”, anything analogous to ownership will cause trouble with the IRS, cap on earnings

Question 27

Intermediate Sanctions

Answer 27

excise tax on excess benefit transactions, called intermediate because it is not as bad as revoking tax exemption, must involve a DQP in order to be considered an intermediate sanction

Question 28

DQP

Answer 28

Directors, Officers, managers, substantial donors, family (spouse, siblings, ancestors, and descendants, companies with 35% held by DQP

Question 29

Avoiding intermediate sanctions

Answer 29

Identify all DQPs, Negotiate at arms-length, document and secure any loans, have and follow a conflict of interest policy

Question 30

Self-dealing

Answer 30

Forbids certain transactions with DQPs
include: sale, exchange, or lease of property, loans, furnishing goods or services, paying compensation to a DQP - except services that are necessary to the charitable purpose