R3-3 Flashcards
Which one of the following types of organizations qualifies as an organization exempt from income tax?
a.
A social club organized and operated exclusively for the pleasure and recreation of its members, supported solely by membership fees, dues, and assessments.
b.
An organization whose purpose is to foster national or international amateur sports competition by providing athletic facilities and equipment.
c.
All “feeder” organizations, primarily conducting business for profit, but distributing 100% of their profits to organizations exempt from income tax.
d.
An “action” organization established for the purpose of influencing legislation pertaining to protection of animal rights.
Choice “a” is correct. A social club organized and operated exclusively for the pleasure and recreation of its members, supported “solely” by membership fees, dues, and assessments is exempt from income tax.
Choice “d” is incorrect. An “action” organization may lose its exempt status due to excessive lobbying. “Excess lobbying expenditures” are defined as the greater of the excess of lobbying expenditures over the lobbying nontaxable amount, or the excess of grass roots expenditures over 25% of the lobbying nontaxable amount.
Choice “c” is incorrect. An organization operated primarily for the purpose of carrying out a trade or business for profit cannot claim tax exemption on the ground that all its profits are payable to exempt organizations. It must rely on its own activities of an exempt nature to gain tax exemption. A feeder organization is taxable on its entire income, not just the portion it designates as its unrelated business income.
Choice “b” is incorrect. An organization whose purpose is to foster national or international amateur sports competition may qualify as an exempt organization only if none of its activities involve the providing of athletic facilities or equipment.
With regard to unrelated business income of an exempt organization, which one of the following statements is correct?
a.
An unrelated trade or business activity that results in a loss is excluded from the definition of unrelated business.
b.
The tax on unrelated business income can be imposed even if the unrelated business activity is intermittent and is carried on once a year.
c.
An exempt organization that earns any unrelated business income in excess of $100,000 during a particular year will lose its exempt status for that particular year.
d.
An exempt organization is not taxed on unrelated business income of less than $1,000.
Choice “d” is correct. An exempt organization is not taxed on unrelated business income of less than $1,000.
Choice “a” is incorrect. Unrelated business taxable income is the gross income from any unrelated trade or business “regularly” carried on, minus business deductions directly connected therewith. If expenses exceed income, a net operating loss occurs, which is subject to the carryback and carryover provisions of net operating losses.
Choice “b” is incorrect. The tax on unrelated business income is not imposed if the unrelated business activity is intermittent and is carried on once a year. Unrelated business taxable income must be derived from an activity that constitutes a trade or business that is regularly carried on and is not substantially related to the organization’s tax-exempt purpose.
Choice “c” is incorrect. No such $100,000 rule exists.
An incorporated exempt organization subject to tax on its unrelated business income:
a.
Must pay at least 70% of the tax due as shown on the return when filed, with the balance of tax payable in the following quarter.
b.
Must make estimated tax payments if its tax can reasonably be expected to be $100 or more.
c.
Must comply with the Code provisions regarding installment payments of estimated income tax by corporations.
d.
May defer payment of the tax for up to nine months following the due date of the return.
Choice “c” is correct. An incorporated exempt organization must comply with the code provisions regarding installment payments of estimated income tax by corporations.
Choice “b” is incorrect. An incorporated exempt organization must make estimated tax payments if its tax can be reasonably expected to be $500 or more, not $100.
Choice “a” is incorrect. An incorporated exempt organization must pay at least 90% of the tax due as shown on the prior year’s return in quarterly estimated tax installments, with the balance due by the due date of the return.
Choice “d” is incorrect. No such deferral period exists for the payment of the tax.
The private foundation status of an exempt organization will terminate if it:
a.
Is governed by a charter that limits the exempt purposes.
b.
Is a foreign corporation.
c.
Becomes a public charity.
d.
Does not distribute all of its net assets to one or more public charities.
Choice “c” is correct. The private foundation status of an exempt organization will terminate if it becomes a public (50% type) charity.
Rule: Section 509 private foundations include all Code 501(C)(3) organizations,except:
Max 50% charitable deduction donees
Broadly publicly-supported organizations
Supporting organizations
Public safety organizations
Choice “a” is incorrect. A private foundation can have a charter that limits its exempt purpose.
Choice “d” is incorrect. A private foundation is not required to distribute all of its net assets to one or more public charities.
Choice “b” is incorrect. Foreign corporations may qualify as a private foundation.
To qualify as an exempt organization, the applicant:
a.
Must not be classified as a social club.
b.
Need not be specifically identified as one of the classes upon which exemption is conferred by the Internal Revenue Code, provided that the organization’s purposes and activities are of a non-profit nature.
c.
May be organized and operated for the primary purpose of carrying on a business for profit, provided that all of the organization’s net earnings are turned over to one or more tax exempt organizations.
d.
Must not be a private foundation organized and operated exclusively to influence legislation pertaining to protection of the environment.
Choice “d” is correct. To qualify as an exempt organization, an applicant must not be a private foundation organized and operated exclusively to influence legislation.
Choice “c” is incorrect. A “feeder” organization, carrying on a trade or business for profit but distributing 100% of the profits to exempt organizations, is itself not tax exempt.
Choice “b” is incorrect. The applicant must be of a type specifically identified as one of the classes upon which exemption is conferred by the Code (e.g., organized for religion, charitable, scientific, etc., purposes).
Choice “a” is incorrect. A social club supported solely by members’ dues and service charges does qualify as an exempt organization.
Salud Welfare Associates is an exempt organization that operates under a corporate charter granted by the state in which Salud’s principal office is located. Salud’s tax on unrelated business taxable income is:
a.
Abated.
b.
Computed at corporate income tax rates.
c.
Computed at rates applicable to trusts.
d.
Credited against the tax on recognized gains.
Rule: Unless the organization is taxable as a trust, its unrelated business taxable income is subject to regular corporate taxes.
Choice “b” is correct. Salud’s tax on unrelated business taxable income is computed at corporate income tax rates.
Choices “a”, “d”, and “c” are incorrect, per the above explanation.
Which of the following statements is correct regarding the unrelated business income of exempt organizations?
a.
An unrelated business does not include any activity where all the work is performed for the organization by unpaid volunteers.
b.
Unrelated business income tax will not be imposed if profits from the unrelated business are used to support the exempt organization’s charitable activities.
c.
If an exempt organization has any unrelated business income, it may result in the loss of the organization’s exempt status.
d.
Unrelated business income relates to the performance of services, but not to the sale of goods.
Choice “a” is correct. An unrelated business does not include any activity where all the work is performed by the organization by unpaid volunteers.
Choice “c” is incorrect. Receipt of unrelated business income in excess of certain limits does not affect the organization’s exempt status, but does trigger a tax on income from excess holdings.
Choice “d” is incorrect. Unrelated business income relates to both the performance of services and the sale of goods that is not substantially related to the exercise or performance of the entity’s purpose or function.
Choice “b” is incorrect. Unrelated business income tax is assessed on the taxable income from any unrelated business. Unrelated business taxable income is the gross income derived from the unrelated trade or business less directly connected allowable deductions.
To qualify as an exempt organization other than a church or an employee’s qualified pension or profit sharing trust, the applicant:
a.
Cannot operate under the “lodge system” under which payments are made to its members for sick benefits.
b.
Need not be specifically identified as one of the classes on which exemption is conferred by the Internal Revenue Code, provided that the organization’s purposes and activities are of a non-profit nature.
c.
Is barred from incorporating and issuing capital stock.
d.
Must file a written application with the Internal Revenue Service.
Choice “d” is correct. To qualify as an exempt organization other than a church or an employee’s qualified pension or profit sharing trust, the applicant must file a written application with the Internal Revenue Service.
Choice “a” is incorrect. Sick benefits may be paid to members under a lodge system.
Choice “b” is incorrect. Applicants for exempt status must qualify under the Internal Revenue Code.
Choice “c” is incorrect. Exempt organizations do incorporate and issue capital stock.
Which of the following activities regularly carried out by an exempt organization will not result in unrelated business income?
a.
Accounting and tax services performed by a local chapter of a labor union for its members.
b.
The sale of laundry services by an exempt hospital to other hospitals.
c.
The sale of a trade association of publications used as course materials for the association’s seminars, which are oriented towards its members.
d.
The sale of heavy-duty appliances to senior citizens by an exempt senior citizens center.
Rule: Unrelated business income is:
Derived from an activity that constitutes a trade or business,
Is regularly carried on, and
Is not substantially related to the organization’s tax-exempt purpose.
Note: An unrelated business does not include any activity where all the work is performed for the organization by unpaid volunteers. Thus, using unpaid volunteers makes that business or activity “related.”
Choice “c” is correct. The sale of a trade association of publications used as course materials for the association’s seminars, which are oriented towards its members, will not result in unrelated business income.
Choices “b”, “d”, and “a” are incorrect, per the above explanation.
An organization that operates for the prevention of cruelty to animals will fail to meet the operational test to qualify as an exempt organization if:
~~The organization engages in insubstantial nonexempt activities
~~The organization directly participates in any political campaign
a.
Yes
Yes
b.
No
Yes
c.
Yes
No
d.
No
No
Rule: Organizations qualify as tax-exempt if:
It is both organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes; for public safety testing; for the prevention of cruelty to children or animals; or to foster national or international amateur sports competition,
No part of its net earnings goes to any private shareholder or individual, and
No substantial part of its activities consists of carrying on propaganda or otherwise attempting to influence legislation (direct participation in a political campaign is prohibited).
Choice “b” is correct. Organizations that carry on insubstantial non-exempt activities may still qualify for its tax-exempt purpose.
Choices “a”, “c”, and “d” are incorrect, per the above explanation.
Which one of the following statements is correct with regard to unrelated business income of an exempt organization?
a.
The tax on unrelated business income can be imposed even if the unrelated business activity is intermittent and is carried on once a year.
b.
An exempt organization is not taxed on unrelated business income of less than $1,000.
c.
An unrelated trade or business activity that results in a loss is excluded from the definition of unrelated business.
d.
An exempt organization that earns any unrelated business income in excess of $100,000 during a particular year will lose its exempt status for that particular year.
Choice “b” is correct. An exempt organization is not taxed on unrelated business income of less than $1,000. The exempt organization is allowed a specific deduction of $1,000 from its unrelated business income.
Choice “d” is incorrect. There is no maximum amount of unrelated business income that may be earned during the year.
Choice “a” is incorrect. An unrelated business is a trade or business regularly carried on by the organization that is not substantially related to the exercise or performance of its exempt purpose or function. If the business activity is intermittent and carried on once a year, the tax imposed on unrelated business income would not be assessed.
Choice “c” is incorrect. An unrelated trade or business activity that results in a loss is not excluded from the definition of unrelated business.
Which of the following exempt organizations must file annual information returns?
a.
Churches.
b.
Those with gross receipts of less than $50,000 in each taxable year.
c.
Internally supported auxiliaries of churches.
d.
Private foundations.
Note: An annual return that discloses substantial contributors and amounts contributed is required of most organizations exempt from income tax under Section 501, including private foundations.
Exempt from this filing requirement are:
Churches,
The exclusively religious activities of a religious order, and church, denomination, or interdenominational sponsored foreign mission societies, and
Certain organizations that normally have annual gross receipts of $50,000 or less.
Choice “d” is correct. Private foundations must file annual information returns.
Choices “a”, “c”, and “b” are incorrect, per the above explanation.
The organizational test to qualify a public service charitable entity as tax exempt requires the articles of organization to:
I.
Limit the purpose of the entity to the charitable purpose.
II.
State that an information return should be filed annually with the Internal Revenue Service.
a.
Both I and II.
b.
Neither I nor II.
c.
II only.
d.
I only.
Explanation
Note: The articles of organization must limit the purpose of the entity to the charitable purpose. “Annual information returns” are not required for all exempt organizations.
Choice “d” is correct. The organizational test to qualify as a public service entity as tax exempt only requires the articles of organization to limit the purpose of the entity to the charitable purpose, but not state that an information return should be filed annually with the Internal Revenue Service.
Choices “c”, “a”, and “b” are incorrect, per the above explanation.
Which of the following activities regularly conducted by a tax-exempt organization will result in unrelated business income?
I.
Selling articles made by disabled persons as part of their rehabilitation, when the organization is involved exclusively in their rehabilitation.
II.
Operating a grocery store almost fully staffed by emotionally disabled persons as part of a therapeutic program.
a.
I only.
b.
II only.
c.
Neither I nor II.
d.
Both I and II.
Rule: Unrelated business taxable income must be derived from an activity that constitutes a trade or business that is regularly carried on and is not substantially related to the organization’s tax-exempt purpose.
Both of the above options appear to be substantially related to the organization’s tax-exempt purpose and, therefore, are not taxable.
Choice “c” is correct, per the above explanation.
Choices “a”, “b”, and “d” are incorrect, per the above explanation.
Maple Avenue Assembly, a tax-exempt religious organization, operates an outreach program for the poor in its community. A candidate for the local city council has endorsed Maple’s anti-poverty program. Which of the following activities is (are) consistent with Maple’s tax-exempt status?
I.
Endorsing the candidate to members.
II.
Collecting contributions from members to the candidate.
a.
Both I and II.
b.
I only.
c.
II only.
d.
Neither I nor II.
Rule: An exempt organization may not:
Directly participate or intervene in any political campaign,
Have any part of net earnings inure to the benefit of any private shareholder or individual, and
Have substantial part of its activities for non-exempt activities.
Choice “d” is correct. Neither endorsing the candidate nor collecting contributions for the candidate is allowed, per the above explanation.
Choices “b”, “c”, and “a” are incorrect, per the above explanation.
