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Exam 15: Exempt Entities

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Question 1

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

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Question 2

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The tax consequences to a donor of making a charitable contribution to a private foundation may be less favorable than the tax consequences to a donor of making a charitable contribution to a public charity.

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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.

Midnight Basketball, Inc., an exempt entity that organizes and conducts basketball games for youths ages 18-25, receives a $20,000 contribution from Brown Shoe Company. Midnight agrees to put Brown's logo on the cover of its monthly newsletter. a. Is the contribution unrelated business income to Midnight? b. Assume that instead of putting Brown's logo on the cover of its newsletter, Midnight agrees to include a statement in the newsletter that youth playing in the games conducted by Midnight wear shoes manufactured only by Brown. Is the contribution unrelated business income to Midnight? b. change if the amount of the payment was $7,500 instead of $20,000? c. Would your answer in

Match the following statements. -Form 990.

Why are some organizations exempt from Federal income tax?

Faith Church, a § 501c)3) organization, operates a bingo game two times each week to raise money to support the youth activities of the church. For the current year, net proceeds from the bingo game are $900,000. a. Determine the tax consequences for Faith Church if the bingo game is conducted in a jurisdiction where for-profit bingo games are illegal and where the bingo game is legal for exempt entities. b. Determine the tax consequences for Faith Church if the bingo game is conducted in a jurisdiction where bingo games are legal for both for-profit and exempt entities.

Matching Give an example of the indicated types of exempt organizations. -§ 501c) 6) business league

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.

The Dispensary is a pharmacy that is part of a § 501c)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 six 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 ensure compliance with this policy. Sales revenue from each of the two sources is as follows for the tax year. Medicine dispensed to hospital patients $\quad \$ 900,000$ Medicine sales to former patients $\quad 100,000$ Calculate the amount of The Dispensary's unrelated business income.

What is the purpose of the unrelated business income tax?

An eligible § 501c)3) organization has made the § 501h) election to participate in lobbying on a limited basis. If the lobbying nontaxable amount is exceeded, what are the potential tax consequences to the exempt organization?

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.

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

For each of the following taxes that are imposed on private foundations and/or foundation managers, match the appropriate initial tax or additional tax. -Tax on failure to distribute adequate amounts of income

Ice, Inc., a § 501c)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.

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 corporate sponsorship payment that is contingent on attendance at a sporting event increases the recipient's unrelated business income.

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

Well, Inc., a private foundation, makes a speculative investment of $400,000 that puts the foundation's assets at risk. Calculate the tax on jeopardizing investments. Assume that corrective action is taken so that the additional tax does not apply.