Deck 15: Exempt Entities

Question 1

To satisfy the "not for profit" requirement for exempt status, the entity may not be engaged in a trade or business.

Answer 1

False

Question 2

All organizations that are exempt from Federal income tax are exempt under § 501(c)(3).

Answer 2

False

Question 3

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.

Answer 3

True

Question 4

While the major objective of the Federal income tax law is to raise revenue, social considerations and economic objectives also affect the tax law.

Question 5

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 organization's support for the taxable year must come from gross investment income and unrelated business taxable income.

Question 6

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 Church's exempt status because the ad opposes George; it does not support his opponent.

Question 7

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.

Question 8

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).

Question 9

An exempt entity in no circumstance is subject to Federal income tax.

Question 10

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.

Question 11

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.

Question 12

A feeder organization is an exempt organization that provides funding for nutritional programs for children.

Question 13

General requirements for exempt status include the organization serving the common good and the organization being a not-for-profit entity.

Question 14

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.

Question 15

Certain § 501(c)(3) exempt organizations are permitted to engage in lobbying activities in the same manner as taxable organizations.

Question 16

The League of Women Voters is a § 501(c)(3) organization.

Question 17

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.

Question 18

Match each of the following items with the appropriate description, in determining whether sales/use tax typically must be collected
a.Taxable
b.Not taxable
A church is one of the types of exempt organizations.

Question 19

Theater, Inc., an exempt organization, owns a printing company, Printers, Inc., which remits 85% of its profits 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%).

Question 20

An intermediate sanction imposed by the IRS on an exempt organization is a greater sanction than revocation of exempt status.

Question 21

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).

Question 22

The unrelated business income tax (UBIT) is calculated by multiplying unrelated business taxable income by the highest corporate tax rate.

Question 23

Federal agencies exempt from Federal income tax under § 501(c)(1) are not subject to the unrelated business income tax (UBIT).

Question 24

Revenue generated by an exempt organization from the distribution of low-cost items is not income from an unrelated trade or business.

Question 25

Even though a church is not required to obtain IRS approval of its exempt status, it still annually must file a Form 990.

Question 26

If the unrelated business income of an exempt organization is $25,000 or less, the unrelated business income tax (UBIT) will be $0.

Question 27

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.

Question 28

A corporate sponsorship payment that is contingent on attendance at a sporting event increases the amount of unrelated business income.

Question 29

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.

Question 30

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.

Question 31

The income from a bingo game or a casino game conducted by an exempt organization may be unrelated business income.

Question 32

If an exempt organization conducts a trade or business that consists of either exchanging or renting to other exempt organizations the organization's donor or membership list, such trade or business is an unrelated trade or business.

Question 33

Debt-financed property consists of all real property of a tax-exempt organization on which there is a mortgage.

Question 34

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.

Question 35

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.

Question 36

Some of the excise taxes which may be imposed on private foundations may be imposed on both the private foundation and the foundation manager.

Question 37

The excise tax imposed on a private foundation's investment income can be imposed as an initial (first-level) tax but cannot be imposed as an additional (second-level) tax.

Question 38

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.

Question 39

Personal property rental income is subject to and real property rental income is not subject to the unrelated business income tax.

Question 40

Only certain exempt organizations must obtain IRS approval to obtain exempt status.

Question 41

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 Tan's unrelated business taxable income?

A) $57,500
B) $65,250
C) $66,000
D) $72,500
E) Some other amount.

Question 42

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)].

Question 43

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.

Question 44

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.

Question 45

Blue, Inc., receives its support from the following sources. 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.

Question 46

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.
E) None of the above.

Question 47

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.

Question 48

All exempt organizations which are subject to the unrelated business income tax must file Form 990-T (Exempt Organization Business Income Tax Return).

Question 49

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.

Question 50

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 organization's 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 organization's exempt purpose.
E) All of the above are requirements.

Question 51

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.

Question 52

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.

Question 53

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.
E) None of the above statements is correct.

Question 54

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.

Question 55

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.

Question 56

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.

Question 57

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.

Question 58

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.

Question 59

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.
E) None of the above statements is correct.

Question 60

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. Ice's 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. Calculate the effect of the sale on Ice's UBTI.

Question 61

Give an example of the indicated types of exempt organizations
a.League of Women Voters.b.Teachers' association.c.American Plywood Association.d.Six Flags over Texas theme park.e.Salvation Army.
§ 501(c)(5) labor organization

Question 62

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?

Question 63

City, Inc., an exempt organization, has included among other amounts the following in calculating net unrelated business income of $500,000.
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.

Question 64

Give an example of the indicated types of exempt organizations
a.League of Women Voters.b.Teachers' association.c.American Plywood Association.d.Six Flags over Texas theme park.e.Salvation Army.
§ 501(c)(3) organization

Question 65

Define average acquisition indebtedness with respect to debt-financed property.

Question 66

What are intermediate sanctions and to what types of exempt organizations do they apply?

Question 67

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 Arbor's unrelated business taxable income.

Question 68

Give an example of the indicated types of exempt organizations
a.League of Women Voters.b.Teachers' association.c.American Plywood Association.d.Six Flags over Texas theme park.e.Salvation Army.
§ 501(c)(6) business league

Question 69

Describe how an exempt organization can be eligible to make lobbying expenditures without losing its tax exemption.

Question 70

Give an example of the indicated types of exempt organizations
a.League of Women Voters.b.Teachers' association.c.American Plywood Association.d.Six Flags over Texas theme park.e.Salvation Army.
§ 501(c)(4) civic league

Question 71

Define a qualified corporate sponsorship payment.

Question 72

How can an exempt organization, otherwise classified as a private foundation, become a public charity?

Question 73

Give an example of the indicated types of exempt organizations
a.League of Women Voters.b.Teachers' association.c.American Plywood Association.d.Six Flags over Texas theme park.e.Salvation Army.
Not an exempt organization

Question 74

Discuss benefits for which an exempt organization may be eligible, other than exemption from Federal income tax.

Question 75

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? A 501(c)(3) with "net income" does not automatically result in a UBIT classification. They must be conducting a trade or business that is regularly carried on and that is not substantially related to its exempt purpose.

Question 76

A § 501(c)(3) organization exchanges its membership lists with another exempt organization. What are the Federal income tax consequences?

Question 77

Under what circumstances are bingo games not treated as an unrelated trade or business?

Question 78

What tax forms are used to apply for exempt status?

Question 79

Define a private foundation.

Question 80

If an exempt organization is required to file an annual information return, on what form is it filed?