Exam 23: Exempt Entities

Midnight Basketball,Inc. ,an exempt organization that organizes and conducts basketball games for youths ages 10-13,receives a $50,000 contribution from Brown Shoe Company.Midnight agrees to put Brown's logo on the cover of its monthly newsletter.

The excise tax that is imposed on private foundations for making jeopardizing investments is imposed because the foundation has made speculative investments that put the foundation's income at risk.

The excise tax imposed on a private foundation's investment income can be imposed both as an initial (first-level)tax and an additional (second-level)tax.

Loyal,Inc. ,is a §501(c)(3)organization that is not classified as a private foundation.During the current year,it is subject to intermediate sanctions.What other options does the IRS have in dealing with an exempt organization engaging in prohibited transactions?

The Dispensary is a pharmacy that is part of a § 501(c)(3)hospital.Its primary mission is to dispense medicines for hospital patients.In addition,the pharmacy dispenses medicines to former hospital patients for a period of up to 30 days after discharge from the hospital.It does this for the dual purpose of convenience to the former patients (i.e. ,the closest pharmacy is 6 miles away),and to ensure that the former patients receive the medicines that have been prescribed for them. The Dispensary carefully carries out the policy of the hospital board that no more than 20% of its gross revenues come from former-patient medicine sales.If necessary,in December of each year,sales to former patients are curtailed to assure compliance with this policy.Sales revenue from each of the two sources is as follows for 2010. Calculate the amount of The Dispensary's unrelated business gross income.

A church is not required to obtain IRS approval for its exempt status.

Theater,Inc. ,an exempt organization,owns a printing company,Printers,Inc. ,which remits 80% of its profits to Theater,Inc.Since Printers remits at least 80% of its profits to Theater,neither Theater,Inc. ,nor Printers,Inc. ,must pay income tax on this $80,000 ($100,000 * 80%).

What income and activities are not subject to the feeder organization rules?

A profit-related activity of an exempt organization avoids the unrelated business income tax if greater than 50% of the merchandise sold had been received as a contribution.

Help,Inc. ,a tax-exempt organization,incurs lobbying expenses of $275,000 during the tax year.Help is eligible for and makes the § 501(h)lobbying expenditure election.During the year,Help spends $1,200,000 carrying out its exempt mission.

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.

Is there a materiality exception associated with the unrelated business income tax?

An exempt organization can be subject to the Federal income tax.

Robin,Inc. ,an exempt organization,acquired a building for $400,000 which it will lease to XYZ,Inc. ,for $40,000 annually.To finance the acquisition of the building,Robin secures a mortgage on it of $250,000.Advise Robin as to whether it has any unrelated debt-financed income or deductions.

How can an exempt organization,otherwise classified as a private foundation,avoid private foundation status?

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.

Is the taxation of a feeder organization influenced by the percentage of its earnings that it remits to an exempt organization?

Swan,Inc. ,a tax-exempt organization,leases a building and equipment to ABC Corporation.The rental income from the building is $160,000 and from the equipment is $12,000.Rental expenses are $100,000 for the building and $11,000 for the equipment.What adjustment must be made to net unrelated business income?

Spirit,Inc. ,a § 501(c)(3)organization,is classified as a private foundation.It has investment income of $80,000.Calculate Spirit's tax on its investment income.

Country,Inc. ,an exempt organization,has included among other amounts the following in calculating net unrelated business income of $400,000.