REG 40 - Tax-Exempt Entities

Question 1

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 for the candidate.

Answer 1

Neither I or II. Exempt organizations cannot endorse political candidates or provide support to them. Therefore, both of these statements are incorrect.

Question 2

Which of the following activities conducted by a tax exempt organization will result in unrelated business income?

I. Selling articles made by handicapped 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 handicapped persons as part of a therapeutic program.

Answer 2

Neither I or II. Neither activity produces unrelated business income because the activities generating the revenue relate to the tax-exempt purpose of the organization. (Articles were made as part of the rehabilitation process and the store was being operated for the purpose of creating a therapeutic process for the participants.)

Question 3

Which of the following exempt organizations must file annual information returns?
A. Churches.
B. Internally supported auxiliaries.
C. Private foundations.
D. Those with gross receipts of $50,000 or less in each taxable year.

Answer 3

C. Private foundations must file Form 990-PF annually.

Question 4

The private foundation status of an exempt organization will terminate if it
A. Becomes a public charity.
B. Is a foreign corporation.
C. Does not distribute all of its net assets to one or more public charities.
D. Is governed by a charter that limits the organization’s exempt purposes.

Answer 4

A. A private foundation is a tax-exempt organization which receives less than one-third of its annual support from its members and the general public. Therefore, public charities that solicit broad public support do not meet this definition.

Question 5

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
I. The organization engages in insubstantial nonexempt activities
II. The organization directly participates in any political campaign

Answer 5

I. No, II. Yes.
Engaging in insubstantial nonexempt activities will not cause an exempt organization to lose its exempt status. However, exempt organizations are strictly prohibited from engaging in political campaigns and activities.

Question 6

T/F: A tax-exempt organization is taxed on unrelated business income that exceeds $1,000.

Answer 6

True

Question 7

T/F: Rents from real property owned by a tax-exempt organization represent unrelated business income.

Answer 7

False.
To be UBI, income must:
1. Be from a business regularly carried on and
2. Be unrelated to the EO exempt purposes

Related income (meaning that the income is not subject to tax) includes:

1. An activity where substantially all work is performed for no compensation
2. A business carried on for the convenience of students or members of a charitable, religious, or scientific organization
3. Sale of merchandise/stock received as contributions
4. In general, investment income
5. Rents received from real property

Question 8

T/F: Section 501(c)(3) organizations can participate in lobbying efforts if an election is made and lobbying expenditures do not exceed certain ceilings.

Answer 8

True

Question 9

T/F: Income from advertising in journals of an exempt organization is unrelated business income.

Answer 9

True