Exam 23: Exempt Entities

Theater, Inc., an exempt organization, owns a printing company, Printers, Inc., which remits 85% of its profits (i.e., taxable income of $100,000) 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%).

Which of the following statements regarding the unrelated business income tax is correct?

By default, an exempt entity is a:

The Jimenez Group, a private foundation, has been found guilty of self-dealing. To minimize its Federal excise taxes from this activity, Jimenez should:

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.

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

Museum's lobbying nontaxable amount is $600,000. Its grass roots nontaxable amount is:

Spirit, Inc., a § 501(c)(3) organization, is classified as a private foundation. It reports investment income of $175,000. Calculate Spirit's tax on its investment income.

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 carries out the policy of the hospital board that no more than 25% 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 the tax year. Calculate the amount of The Dispensary's unrelated business income.

Both of these organizations are exempt from Federal income tax. A donor can claim a charitable contribution for a gift to:

A private foundation can be subject to an excise tax on:

To what types of organizations does the UBIT apply?

Restful, Inc., a § 501(c)(3) exempt organization, hires a registered lobbyist to promote its position on pending legislation. For the year, its lobbying expenses are $100,000. Restful makes the § 501(h) election. The lobbying nontaxable amount is $90,000. a. Will the lobbying expenses result in Restful losing its exempt status? b. Calculate the amount of any tax that Restful must pay associated with the lobbying expenses.