T3-M5 Tax-Exempt Organization and Advanced Topics

Question 1

what is a tax-exempt organization under sec. 501(c)(3)?

Answer 1

an organization is not-for-profit and must meet the following:
- organization must be a corporation, unincorporated association, or trust
+ sole proprietorships, partnerships, and individuals do NOT qualify

• there must be an exempt purpose
  + charitable
  + religious
  + scientific
  + testing for public safety
  + literary
  + educational
  + fostering national or international amateur sports competition (as long as its activities do not involve providing athletic facilities or equipment)
  + prevention of cruelty to children or animals
• no private benefit is allowed
• there must be no political or legislative activity associated with the organization
• must file annual Form 990 returns

Question 2

what is unrelated business income (UBI) and its taxation?

Answer 2

Meet the following and tax at corporate tax rate:
- income derived from activities that are NOT substantially related to its tax-exempt purpose
- income derived from activities that constitutes a trade or business
- regularly carried on

Question 3

what is exempt function income?

Answer 3

is gross income from dues, fees, charges, or similar items paid by members for the goods, facilities, or services provided to members and their families and guests

Question 4

what items are excluded from UBI?

Answer 4

• bingo games
• activity conducted for the convenience of an organization’s members
• convention or trade show activity
• exchange or rental of membership lists
• sale of merchandise received as gifts or contributions (ex: thrift shop)
• sale of articles made by disabled persons as part of their rehabilitation
• activity where substantially all the work is performed by unpaid volunteer workers
• dividends, interest, annuities, and other investment income
• royalties
• rents from rental property (no personal services provided or rents attributable to personal property are > 50% of total rents
• income from research by hospital or university and colleges
• gain/loss from disposition of property not held primarily for sale to customers in the ordinary course of business