To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 15 EXEMPT ENTITIES SOLUTIONS TO PROBLEM MATERIALS Question/ Problem Learning Objective LO 1, LO LO LO LO LO LO LO LO 10 LO 11 12 13 14 LO LO LO LO 4, 15 16 LO LO 17 18 LO LO 19 LO 20 LO Topic Exempt organizations: church Exempt organizations: purpose Exempt organizations: types Exempt organizations: types Exempt organizations: characteristics Exempt organizations: charitable contribution deduction Exempt organizations: prohibited transactions Exempt organizations: lobbying expenditures Exempt organizations: lobbying expenditures Exempt organizations: lobbying expenditures Intermediate sanctions Feeder organization Feeder organization Private foundation: definition and disadvantages Private foundation: definition Private foundation: external and internal support tests Private foundation: taxes imposed Private foundation: tax on investment income Private foundation: tax on excess business holdings Private foundation: tax on jeopardizing investments Status: Present Edition Q/P in Prior Edition New Unchanged Modified Modified Unchanged New Unchanged Modified Unchanged New Unchanged Modified Modified Unchanged 11 12 13 14 Modified Unchanged 15 16 Unchanged New 17 Modified 19 Modified 20 Instructor: For difficulty, timing, and assessment information about each item, see p 15-4 15-1 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-2 Question/ Problem 2012 Corporations Volume/Solutions Manual Learning Objective 21 LO 22 23 24 25 26 27 LO 4, LO LO LO LO LO 6, 28 29 LO 1, LO 30 31 32 33 LO LO LO 1, LO 1, 34 35 *36 *37 38 39 *40 *41 *42 LO LO LO LO 2, LO LO 3, 6, LO LO LO 43 LO 44 LO 5, 45 LO 46 47 48 *49 *50 LO LO LO LO LO 51 *52 53 LO LO LO 54 55 LO LO Topic Private foundation: tax on taxable expenditures Private foundation: excise taxes Unrelated business income tax Unrelated business income tax: definition Unrelated business income tax: definition Unrelated trade or business Unrelated trade or business versus feeder organization Unrelated trade or business Unrelated trade or business: regularly carried on test Unrelated trade or business: bingo games Debt-financed property: exception Obtaining exempt status Annual filing requirements and obtaining exempt status Annual filing requirements Disclosure requirements Exempt organization: types Exempt organization: lobbying expenditures Exempt organization: intermediate sanctions Feeder organization Feeder organization Classification as a private foundation Private foundation: tax on net investment income Private foundation: tax on failure to distribute income Private foundation: tax on jeopardizing investments Private foundation: tax on taxable expenditures Unrelated business income Unrelated business income tax Unrelated business income tax Unrelated business income tax Unrelated business income tax: $1,000 threshold and calculation of UBIT Unrelated trade or business: definition Unrelated trade or business: definition Unrelated business income tax: sponsorship payments Unrelated trade or business: bingo games Unrelated business taxable income: effect of charitable contributions Status: Present Edition Q/P in Prior Edition Modified 21 Modified Modified Unchanged New Unchanged Unchanged 22 23 24 Modified Unchanged 28 29 Unchanged Unchanged Unchanged Modified 30 31 32 33 Unchanged Unchanged Unchanged New Modified Unchanged Modified Unchanged Modified 34 35 36 Modified 43 Unchanged 44 Modified 45 Unchanged Modified Unchanged Modified Modified 46 47 48 49 50 Unchanged Unchanged Modified 51 52 53 Unchanged New 54 26 27 38 39 40 41 42 Instructor: For difficulty, timing, and assessment information about each item, see p 15-4 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exempt Entities Question/ Problem 56 57 Learning Objective LO 3, LO *58 LO *59 LO 60 LO 61 LO *62 LO 63 64 65 LO LO LO Topic Taxable subsidiary Unrelated business taxable income: rent income Unrelated business taxable income: rent income Unrelated business taxable income: sale of assets Unrelated business taxable income: effect of charitable contributions Debt-financed property and acquisition indebtedness Debt-financed property: definition and adjusted basis Reporting requirements Reporting requirements Charitable contribution deduction to donor 15-3 Status: Present Edition Q/P in Prior Edition Unchanged New 56 Unchanged 58 New Unchanged 60 Modified 61 Modified 62 Unchanged Modified Unchanged 63 64 65 *The solution to this problem is available on a transparency master Instructor: For difficulty, timing, and assessment information about each item, see p 15-4 Research Problem 10 11 Topic Filing requirements Exempt status: revocation Unrelated business income tax Unrelated business income tax Unrelated business income Unrelated business income tax Tax-exempt status of a church Internet activity Internet activity Internet activity Internet activity Status: Present Edition Unchanged Unchanged New Unchanged Unchanged Unchanged Unchanged Unchanged New Unchanged Unchanged Q/P in Prior Edition 10 11 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-4 2012 Corporations Volume/Solutions Manual Question/ Problem Est’d completion time Difficulty Assessment Information AICPA* AACSB* Core Comp Core Comp Easy Easy Easy Easy Easy Easy Easy Medium 5 10 10 5 10 FN-Reporting FN-Reporting FN-Reporting FN-Reporting FN-Reporting FN-Reporting FN-Reporting FN-Reporting 10 Easy Medium 10 11 12 Easy Easy 10 10 13 14 15 16 Easy Easy Medium Easy 10 10 10 10 17 Easy 10 18 Easy FN-Measurement FN-Measurement | FNReporting FN-Reporting FN-Measurement | FNReporting FN-Reporting FN-Reporting FN-Reporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement 19 20 21 22 Easy Easy Easy Medium 10 10 10 10 23 Easy 10 24 Easy 25 Medium 10 26 27 Easy Easy 10 28 29 30 Easy Easy Medium 10 10 10 FN-Measurement FN-Measurement FN-Measurement FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Reporting FN-Measurement | FNReporting FN-Reporting FN-Reporting FN-Reporting 31 32 33 Medium Easy Medium 10 10 10 FN-Reporting FN-Reporting FN-Reporting 34 Easy FN-Reporting Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic | Reflective Thinking Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic | Reflective Thinking Analytic Analytic Analytic Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic Analytic | Reflective Thinking Analytic Analytic | Reflective Thinking Analytic Analytic Analytic | Reflective Thinking Analytic Analytic Analytic | Reflective Thinking Analytic *Instructor: See the Introduction to this supplement for a discussion of using AICPA and AACSB core competencies in assessment © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exempt Entities Question/ Problem Difficulty Est’d completion time 35 36 37 Easy Easy Medium 10 10 15 38 39 Medium Medium 10 20 40 Easy 10 41 Medium 20 42 43 44 Medium Medium Medium 15 10 15 45 46 Medium Hard 10 15 47 Easy 10 48 49 Medium Hard 20 15 50 51 Easy Medium 10 15 52 Medium 10 53 Easy 54 Easy 10 55 56 Medium Medium 10 10 57 Medium 10 58 Hard 15 59 Easy 10 60 61 Easy Easy 10 10 62 63 64 65 Medium Medium Medium Medium 10 10 10 10 15-5 Assessment Information AICPA* AACSB* Core Comp Core Comp FN-Reporting FN-Reporting FN-Measurement | FNReporting FN-Measurement FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement FN-Measurement FN-Measurement | FNReporting FN-Measurement FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement FN-Measurement | FNReporting FN-Measurement FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement FN-Measurement | FNReporting FN-Measurement FN-Reporting FN-Reporting FN-Measurement Analytic Analytic Analytic | Reflective Thinking Analytic Communication | Analytic Analytic Communication | Analytic Analytic Analytic Analytic Analytic Communication | Analytic Analytic Communication | Analytic Analytic Analytic Communication | Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic *Instructor: See the Introduction to this supplement for a discussion of using AICPA and AACSB core competencies in assessment © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-6 2012 Corporations Volume/Solutions Manual CHECK FIGURES 37.a 37.b 38.a 38.b 39.a 39.b 39.c 39.d 40 41.a 41.b 41.c 42.a 42.b 42.c 43.a 43.b 44.a 44.b 44.c 44.d 45.a 45.b 46.a 46.b 47.a 47.b 48.a 49.a 49.b 49.c 49.d 49.e 49.f 50 51.a Could forfeit exempt status; penalty of $55,000 Tax on excess lobbying expenditures of $50,000 $15,000 excise tax $37,500 first-level excise tax; $300,000 second-level excise tax Yes; $187,000 No No change in answer Still a feeder organization $119,000 Yes No Not a private foundation $101,000 $2,020 Defray audit costs 2011 $22,500; 2012 $0 $0 Yes Rectify $25,000; Otis $5,000 Rectify $125,000; Otis $10,000 Yes $25,000 $5,000 $900,000 $900,000 Not unrelated business income Unrelated business taxable income $360,000, $122,400 tax liability $1,360,000 $101,810 $68,660 $0 $0 $0 $217,600 $1,950 UBIT No 51.b None 52.a UBTI $0, not an unrelated trade or business 52.b Net income $1,525,000; UBTI $0 53.a No UBI 53.b $80,360 tax 54.a No, but will result in UBIT 54.b $18,850 55.a $40,000 charitable contribution deduction 55.b $39,000 charitable contribution deduction 56.a Tax $92,450 56.b $0 57 $130,000 UBTI 58.a $225,000 lease rental income is included in gross unrelated business income Related expenses of $65,000 are deducted in calculating net unrelated business income of $160,000 58.b $225,000 lease rental income is included in gross unrelated business income Related expenses of $70,000 are deducted in calculating unrelated business income of $155,000 59 Increase UBTI by $0 60 $44,000 ($40,000 + $4,000) charitable contribution deduction; $4,000 negative adjustment 61 Yes, 20% is debt-financed property 62 Building D is debt-financed property 63.a Yes; Form 990 63.b Yes; Form 990-T 63.c October 15 64.a Yes 64.b Form 990-PF 64.c October 15, 2011 64.d Form 990; October 15, 2011 65.a $90,000 65.b $55,000 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exempt Entities 15-7 DISCUSSION QUESTIONS As a C corporation, Eggshell, Inc is subject to double taxation However, First Church is classified as an exempt organization Therefore, a church generally is not subject to Federal income taxation A church, however, may be subject to the unrelated business income tax (UBIT) Apparently First Church is not subject to the UBIT associated with its gift and book shop pp 15-2, 15-6, and 15-17 Section 501 permits certain organizations to be either partially or completely exempt from Federal income taxation The social considerations objective provides the justification for this treatment by Congress Congress recognizes the benefit of having certain activities which promote the general welfare being performed by private organizations, rather than having the function directly performed by the Federal government pp 15-2 and 15-3 All of these organizations qualify for exempt status, except for Disneyland (d), Green Bay Packers (i), and Cleveland Indians ( j) Exhibit 15.1 a Kingsmill Country Club: § 501(c)(7) b Shady Lawn Cemetery: § 501(c)(13) c Amber Credit Union: § 501(c)(14) d Veterans of Foreign Wars: § 501(c)(19) e Boy Scouts of America: § 501(c)(3) f United Fund: § 501(c)(3) g Federal Deposit Insurance Corporation: § 501(c)(1) h Bruton Parish Episcopal Church: § 501(c)(3) i PTA: § 501(c)(3) j National Press Club: § 501(c)(7) k Brown University: § 501(c)(3) Exhibit 15.1 Many of the organizations that qualify for exempt status share the following characteristics • The organization serves some type of common good • The organization is not a for-profit entity • Net earnings not benefit the members of the organization • The organization does not exert political influence p 15-6 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-8 2012 Corporations Volume/Solutions Manual To qualify for a charitable contribution deduction, the donee exempt organization must be a qualified charitable contribution recipient (e.g., the Red Cross rather than the National Football League) Addie contributed to a qualified charitable contribution recipient whereas Robert did not p 15-7 Engaging in § 503 prohibited transactions by an exempt organization can result in three negative tax consequences First, part or all of the organization’s income may be subject to Federal income tax Second, the organization may forfeit its exempt status Finally, intermediate sanctions may be imposed on certain exempt organization insiders p 15-8 a The issue facing Helping People, Inc., is the effect of hiring the law firm in Washington to lobby for it Such lobbying could result in the loss of tax-exempt status and/or the imposition of penalty taxes However, if Helping People is eligible to elect to make lobbying expenditures of a limited amount under § 501(h) (and this appears to be the case), then it could so without any negative consequences as long as it stays within the statutory parameters b The answer in a would not change pp 15-8 to 15-10 and Footnote 14 If an exempt organization makes the § 501(h) election to lobby on a limited basis, its lobbying expenditures must not exceed its lobbying expenditures ceiling The lobbying expenditures ceiling is equal to 150% of the lobbying nontaxable amount However, even if this requirement is satisfied, the exempt organization may still be subject to tax associated with its excess lobbying expenditures at a 25% rate Excess lobbying expenditures are computed as the excess of the lobbying expenditures for the taxable year over the lobbying nontaxable amount pp 15-8 and 15-9 10 Organizations exempt under § 501(c)(3) generally are limited from attempting to influence legislation (lobbying activities) or from participating in political campaigns A violation can result in the forfeiture of exempt status However, certain § 501(c)(3) organizations can elect to have their lobbying activities measured by an ‘‘expenditure’’ test Other § 501(c)(3) organizations who cannot make a § 501(h) election lose their tax-exempt status if a substantial part of the organization’s activities consist of lobbying [‘‘no substantial part’’ test under § 501(c)(3)] Eligible for this election are most § 501(c)(3) organizations (educational institutions, hospitals, and medical research organizations; organizations supporting government schools; organizations publicly supported by charitable contributions; certain organizations that are publicly supported by various sources including admissions, sales, gifts, grants, contributions, or membership fees; and certain organizations that support certain types of public charities) pp 15-8 and 15-9 11 The statement is false There is no direct relationship between intermediate sanctions and unrelated business gross income or unrelated business net income Intermediate sanctions on public charities take the form of excise taxes imposed on disqualified persons (any individuals who are in a position to exercise substantial influence over the affairs of the organization) who engage in excess benefit transactions and on exempt organization managers who participate in such transactions knowing that it is improper Such excess benefit transactions include transactions in which a disqualified person engages in a non-fair market value transaction with the exempt organization or receives unreasonable compensation p 15-10 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exempt Entities 12 15-9 a Blue is a for-profit entity that is classified as a feeder organization Therefore, it is taxed as a regular corporation The amount received by Service from Blue is exempt from Federal income tax, since it is used in supporting Service’s tax-exempt mission (i.e., both the amount to be spent currently and the amount to be invested) b The answer in a would not change p 15-11 13 The activities described in a., d., and e are not subject to the tax imposed on a feeder organization The activity described in b does not qualify for the exception because the work is done by paid employees The activity described in c does not qualify for the exception because there is no mention of the used property being received as contributions or gifts The activity described in f is that of a feeder organization and is subject to the tax on feeder organizations pp 15-11, 15-23, and 15-24 14 A private foundation is an organization which may satisfy the requirements for exempt status As a result of being a private foundation, excise taxes may be levied on the private foundation, even though it qualifies as an exempt organization In addition, donors who make contributions to a private foundation may not be treated as favorably with respect to the charitable contribution deduction as they would if the exempt organization was not a private foundation The general purpose of the excise taxes is to motivate the private foundation to refrain from certain actions The reduced charitable contribution deduction results because the organization envisions a more narrow definition of the common good pp 15-12 to 15-14 15 Of the listed exempt organizations, churches (a and b.), educational institutions (h.), and hospitals (c.) are § 501(c)(3) organizations that are statutorily excluded from classification as a private foundation Organizations that otherwise would be classified as private foundations are excluded from the classification because they receive broad public support (e and f.) Thus, it appears that only the NFL (d.) and the Burr’s Foundation (g.) would be classified as private foundations pp 15-12 to 15-14 16 Broadly supported § 501(c)(3) organizations are outside the definition of a private foundation To satisfy the broadly supported provision, the § 501(c)(3) organization must meet both an external support test and an internal support test The external support test requires that more than one-third of the organization’s support each taxable year must normally come from the general public (excluding disqualified persons), governmental units, or organizations described in category of the listing of § 501(c)(3) organizations which are not private foundations Such support must be in the following forms • Gifts, grants, contributions, and membership fees • Gross receipts from admissions, sales of merchandise, performance of services, or the furnishing of facilities in an activity that is not an unrelated trade or business for purposes of the unrelated business income tax However, such gross receipts from any person or governmental agency in excess of the greater of $5,000 or 1% of the organization’s support for the taxable year are not counted The internal support test limits the amount of support normally received from the following sources to one-third of the organization’s support for the taxable year • Gross investment income (gross income from interest, dividends, rents, and royalties) • Unrelated business taxable income minus the related tax pp 15-12 and 15-13 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-10 17 2012 Corporations Volume/Solutions Manual Several types of taxes may be imposed on the private foundation A so-called “audit fee” is levied on the net investment income of a private foundation unless the private foundation is an exempt operating foundation Second, if the private foundation engages in the following types of prohibited transactions, it will be subject to an excise tax • Tax on self-dealing • Tax on failure to distribute income • Tax on excess business holdings • Tax on investments which jeopardize charitable purposes • Tax on taxable expenditures The audit fee is designed to defray the costs incurred by the Federal government for audits of private foundations The excise taxes on prohibited transactions are designed to motivate the private foundation to refrain from certain actions p 15-15 and Concept Summary 15.3 18 a In this case, the tax on the net investment income of Sunset is imposed The standard rate is 2% However, it may be possible to reduce the tax rate to 1% if certain distribution requirements are satisfied An exempt operating foundation is not subject to this tax b The purpose of the tax on net investment income of a private foundation is to help defray IRS audit expenses So Sunset is not jeopardizing its exempt status by generating investment income of $485,000 Concept Summary 15.3 19 a A private foundation that has investments that enable it to control unrelated businesses is subject to the tax on excess business holdings The initial tax in this case for Amethyst is $22,500 ($450,000 excess business holdings × 5%) The additional tax would be $900,000 ($450,000 × 200%) b The answer in a would not change Concept Summary 15.3 20 A private foundation that has speculative investments is subject to the tax on jeopardizing investments The initial tax in this case for Matte is $33,750 ($675,000 of speculative investments × 5%) The additional tax would be $168,750 ($675,000 × 25%) Concept Summary 15.3 21 A private foundation that makes expenditures that should not be made by private foundations is subject to the tax on taxable expenditures The initial tax in this case for Shining Day is $80,000 ($800,000 taxable expenditures × 10%) The additional tax would be $800,000 ($800,000 × 100%) Concept Summary 15.3 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-14 2012 Corporations Volume/Solutions Manual Bill and Melinda Gates Foundation University of Richmond UL PGA Tour VFW Dallas Rodeo Club PTA Toano Cemetery Association Alpha Chi Omega Sorority Green, Inc., Legal Services Plan National Press Club FDIC League of Women Voters § 501(c)(3) § 501(c)(3) § 501(c)(6) § 501(c)(6) § 501(c)(19) § 501(c)(7) § 501(c)(3) § 501(c)(13) § 501(c)(7) § 501(c)(20) § 501(c)(7) § 501(c)(1) § 501(c)(4) Exhibit 15.1 37 a Absent the § 501(h) election to participate in lobbying activities on a limited basis, Innovation is in violation of the qualification and maintenance requirement which prohibits § 501(c)(3) organizations from attempting to influence legislation (i.e., lobbying activities) or participating in political campaigns Therefore, the lobbying expenditures can result in Innovation forfeiting its exempt status In addition, Innovation is subject to a tax on the lobbying expenditures of $55,000 ($1.1 million × 5%) If the organization’s management knew that the lobbying expenditures were likely to result in Innovation no longer being described in § 501(c)(3) and if such activities were willful and not due to reasonable cause, a tax of $55,000 will also be levied on the organization’s management b The § 501(h) election permits the medical Innovation organization to participate in lobbying activities on a limited basis To determine the extent of participation permitted, it is necessary to calculate the lobbying nontaxable amount, which is the lesser of the following • $1,000,000 • $900,000 [$225,000 + 05($15 million – $1.5 million)] The ceiling on permitted lobbying expenditures then is calculated Lobbying nontaxable amount × Statutory rate = Ceiling on permitted lobbying expenditures $ 900,000 × 150% $1,350,000 Since Innovation’s lobbying expenditures of $1,100,000 are below the ceiling of $1,350,000, all of the lobbying expenditures are permitted lobbying expenditures However, since the lobbying expenditures exceed the lobbying nontaxable amount, Innovation has excess lobbying expenditures of $200,000 ($1,100,000 – $900,000) The tax liability on the excess lobbying expenditures is $50,000 ($200,000 × 25%) c A 50% increase in lobbying expenditures results in total lobbying expenditures of $1,650,000 ($1,100,000 + $550,000) With the § 501(h) election, the ceiling on permitted lobbying expenditures is $1,350,000 Therefore, the total expenditures exceed the ceiling by $300,000 ($1,650,000 – $1,350,000) The tax to an exempt © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exempt Entities 15-15 organization with disqualifying lobbying expenditures is $82,500 ($1,650,000 × 5%) If the organization’s management knew that the lobbying expenses were likely to result in Innovation no longer being described in § 501(c)(3) and if such activities were willful and not due to reasonable cause, a tax of $82,500 also is levied on the organization’s management Innovation should not make such non-permitted lobbying expenditures, since this could result in the loss of exempt status In addition, since the lobbying expenditures exceed the lobbying nontaxable amount, Innovation has excess lobbying expenditures of $750,000 ($1,650,000 – $900,000) The tax liability on the excess lobbying expenditures is $187,500 ($750,000 × 25%) Considering these tax effects Innovation definitely should not increase its lobbying expenditures to $1,650,000 At most, the expenditures should be increased by $250,000 to $1,350,000 pp 15-8 to 15-10 and Figure 15.1 38 a Choice has engaged in an excess benefit transaction that is subject to excise taxes on the amount of the unreasonable compensation However, under the intermediate sanctions, the excise taxes are levied on the disqualified person and on exempt organization managers, rather than being levied directly on Choice For our situation, organization managers could include the chief operating officer of Choice and directors of Choice if they participated in the transaction knowing that it was improper The amount of the excise tax on organization managers is 10% of the excess benefit with a statutory ceiling of $20,000 per transaction Thus, in this case, the excise tax is $15,000 ($150,000 × 10% = $15,000, which does not exceed the $20,000 limit) b Kayla would be labeled a disqualified person Thus, the first-level excise tax imposed on her would be $37,500 ($150,000 × 25%) In addition, if the excess benefit transaction is not corrected within the taxable period, a second-level tax at a 200% rate would be imposed on Kayla Thus, the amount of the second-level tax would be $300,000 ($150,000 × 200%) pp 15-10 and 15-11 39 a b Quail is a feeder organization Even though it remits its earnings to an exempt organization, Quail is subject to the Federal income tax on corporations The income tax on corporate taxable income of $550,000 is $187,000 ($550,000 × 34% corporate tax rate) Hoffman, Raabe, Smith, and Maloney, CPAs 5191 Natorp Boulevard Cincinnati, OH 45040 September 18, 2011 Mr Arthur Morgan, Treasurer Roadrunner, Inc 500 Rouse Tower Rochester, NY 14627 Dear Mr Morgan: © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-16 2012 Corporations Volume/Solutions Manual I am responding to your inquiry regarding whether the potential liquidation of Quail, Inc., a 100% owned taxable subsidiary, into Roadrunner would enable the earnings of Quail to be tax-exempt Presently, the earnings of Quail are subject to the Federal corporate income tax Based on your projection of annual earnings of approximately $550,000, Quail’s corporate tax liability would be $187,000 ($550,000 × 34%) The liquidation of Quail into Roadrunner would bring about the legal dissolution of Quail and would terminate it being taxed as a separate entity However, the sporting goods business would be classified as an unrelated trade or business and thus be subject to the unrelated business income tax Even though Roadrunner is tax-exempt, the projected earnings of the sporting goods business conducted by it still would be subject to taxation The corporate tax liability on the $550,000 would remain the same, $187,000 ($550,000 × 34%) Since your only objective for liquidating Quail is to reduce the income tax liability, I recommend that you continue to operate Quail as a subsidiary If you would like to discuss this further, please contact me Sincerely, Karen Roby, CPA Partner c The answer would not change if Roadrunner acquired the Quail stock by either purchase or by gift How Roadrunner acquired the Quail stock (e.g., purchase, gift, or inheritance) is not relevant to Quail’s classification as a feeder organization d Quail still is a feeder organization So its tax liability is $22,250 [($50,000 × 15%) + ($25,000 × 25%) + ($25,000 × 34%)] The percentage of the after-tax earnings remitted by Quail to Roadrunner is not relevant in calculating the tax liability of Quail pp 15-11 and 15-17 to 15-20 40 Respond, Inc has a zero Federal income tax liability for the current year since it is a § 501(c)(3) exempt organization However, Landscaping is a feeder organization with $350,000 net income subject to the corporate income tax rates So its Federal income tax liability is calculated as follows $ 50,000 × 15% = $ 7,500 25,000 × 25% = 6,250 25,000 × 34% = 8,500 235,000 × 39% = 91,650 5,100 15,000 × 34% = $350,000 $119,000 or $350,000 × 34% = $119,000 p 15-11 41 a For an organization to qualify as receiving broad public support, both the external support test and the internal support test must be satisfied © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exempt Entities 15-17 The total support received by Pigeon is $310,800 For purposes of the external support (more than one-third support) test, the following amounts are included Governmental unit A for services rendered (limited to) Governmental unit B for services rendered General public for services rendered Contributions from other than disqualified persons Qualifying support $ 5,000 4,500 75,000 160,000 $244,500 Therefore, the external support test is satisfied ($244,500 ÷ $310,800 = 78.7%) For purposes of the internal support (not more than one-third support) test, only the gross investment income of $39,000 is within the limited categories Thus, this test also is satisfied ($39,000 ÷ $310,800 = 12.5%) Pigeon satisfies both tests for receiving broad public support b c Since Pigeon satisfies both of the required tests for being an organization that is broadly supported by the public, it is not a private foundation Hoffman, Raabe, Smith, and Maloney, CPAs 5191 Natorp Boulevard Mason, OH 45040 February 25, 2011 Mr Arnold Horn, Treasurer Pigeon, Inc 250 Bristol Road Charlottesville, VA 22903 Dear Mr Horn: As you requested, I have determined whether Pigeon, Inc., is a private foundation for the prior year Pigeon is not a private foundation For Pigeon not to be classified as a private foundation, it must satisfy both an external support (i.e., broadly supported) test and an internal support test The total support received by Pigeon is $310,800 To satisfy the external support test, more than onethird of Pigeon’s support must normally come from certain external sources For Pigeon, this includes the following Governmental unit A for services rendered Governmental unit B for services rendered General public for services rendered Contributions from other than disqualified persons $ 5,000 4,500 75,000 160,000 $244,500 Thus, the external support test is satisfied ($244,500 ÷ $310,800 = 78.7%) To satisfy the internal support test, not more than one-third of Pigeon’s support must normally come from certain internal sources For Pigeon, this includes the following Gross investment income $39,000 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-18 2012 Corporations Volume/Solutions Manual Thus, the internal support test is satisfied ($39,000 ÷ $310,800 = 12.5%) If I can be of further assistance, please let me know Sincerely, Wilton Maxwell, CPA Partner pp 15-12 to 15-15 and Example 42 a Net investment income is calculated as follows Gross investment income Interest income Rental income Dividend income Royalty income Allowable deductions Net investment income $29,000 61,000 15,000 22,000 $127,000 (26,000) $101,000 Neither the unrelated business income of $80,000 nor the unrelated business expenses of $12,000 are relevant in calculating net investment income b Net investment income Statutory rate Tax on net investment income $101,000 × 2% $ 2,020 c The principal purpose of the tax is to defray the costs incurred by the Federal government for IRS audits of private foundations Concept Summary 15.3 43 a The initial tax applies for the 2010 undistributed taxable income to the extent that it is not distributed by the end of 2011 Thus, for 2011, the initial tax is $22,500 ($150,000 × 15%) and the initial tax for 2012 is $0 ($0 × 15%) b All of the inadequate distribution has been distributed by the assessment date Therefore, there is no additional tax pp 15-15 to 15-17, Example 4, and Concept Summary 15.3 44 a Based on the data provided, it appears that Rectify is making speculative investments that put the private foundation’s assets at risk If this is the case, the tax on jeopardizing investments applies b The initial tax imposed on Rectify is $25,000 ($500,000 × 5%) and the initial tax imposed on Otis is $5,000 The calculated initial tax for Otis is $25,000 ($500,000 × 5%), but the statutory ceiling is $5,000 c The additional tax for Rectify would be $125,000 ($500,000 × 25%) The calculated additional tax for Otis is $25,000 ($500,000 × 5%), but the statutory ceiling is $10,000 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exempt Entities d 15-19 Both Rectify and Otis are better off financially if the prohibited transaction (i.e., jeopardizing investment) is corrected within the correction period With the correction, Rectify can avoid an additional tax of $125,000 and Otis can avoid an additional tax of $10,000 Concept Summary 15.3 45 a The initial tax on the private foundation (Black Pearl) is $25,000 ($250,000 × 10%) b The initial tax on the foundation manager appears to be $6,250 ($250,000 × 2.5%) However, this amount is subject to a statutory ceiling of $5,000 Concept Summary 15.3 46 a The net unrelated business income of the museum consists of the gift shop profit of $900,000 The gross unrelated business income consists of the sales revenue from the gift shop and is offset by related deductions The fact that the $900,000 is used to support museum operations does not modify this result b The amount of the net unrelated business income still is $900,000 c The Open Museum 250 Oak Avenue Peoria, IL 61625 February 4, 2011 Mr Wayne Davis 45 Pine Avenue Peoria, IL 61625 Dear Mr Davis: I am responding to your inquiry regarding the tax-exempt status of The Open Museum The Open Museum generally is exempt from Federal income taxation under § 501(c)(3) of the Internal Revenue Code We applied for Form 1023—Application for Recognition of Exemption Under § 501(c)(3) and were granted exempt status in 1980 Our gift shop is considered an unrelated trade or business even though all of its profits are used in carrying out the mission of the museum Therefore, the profits of the gift shop are taxed at the corporate income tax rates For last year, this amounted to a tax liability of $306,000 ($900,000 × 34%) According to our CPA, Janet Carey, if the gift shop were staffed completely by volunteers, its profits would also be exempt As we discussed at the board meeting, that is not feasible, based on the scale of the gift shop operations Except for the gift shop, all of our income is tax-exempt This includes our admission fees of $1.7 million and $600,000 of endowment income If I can be of further assistance, please let me know Sincerely, Ted Waller, Treasurer © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-20 2012 Corporations Volume/Solutions Manual pp 15-15 to 15-17 and Concept Summary 15.4 47 a Since the sale of the training program products is substantially related to the exempt purpose of Upward, the activity is not classified as an unrelated trade or business Thus, Upward’s net income from the activity of $360,000 ($800,000 – $190,000 – $50,000 – $200,000) is not subject to the UBIT b Since the sale of the training program products is not substantially related to the exempt purpose of Upward, the activity is classified as an unrelated trade or business Thus, Upward’s net income from the activity of $360,000 is unrelated business taxable income The tax liability is $122,400 ($360,000 × 34%) pp 15-17 to 15-23 and Figure 15.2 48 a The corporate tax rates are used to calculate the unrelated business income tax Thus, Perch’s unrelated business income tax is $1,360,000 ($4,000,000 × 34%) b Unrelated Business Income Tax for New Members of the Board of Perch, Inc I Introduction A Reason for the UBIT: nonexempt organizations (regular taxable business entities) would be at a substantial disadvantage when trying to compete with an exempt organization B Tax effect C II Treats the unrelated business income as if it were subject to the corporate income tax Apply the corporate tax rates to unrelated business taxable income to calculate the unrelated business income tax (UBIT) Applicable To all organizations that are exempt from Federal income tax under § 501(c), except Federal agencies Includes religious, charitable, educational, literary, etc., organizations plus most other exempt organizations Does not apply if unrelated business income is not greater than $1,000 Unrelated trade or business A To be classified as such, must satisfy the following Organization conducts a trade or business Trade or business is not substantially related to the exempt purpose of the organization Trade or business is regularly carried on by the organization © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exempt Entities B C D E III 15-21 Exceptions from such classification Substantially all the work is done by volunteers Trade or business consists of selling merchandise and substantially all the merchandise has been received as gifts or contributions Special rule for § 501(c)(3) organizations and for state colleges and universities Special rule for most employee unions Definition of trade or business Any activity conducted for the production of income through the sale of merchandise or the performance of services Activity may be part of a larger set of activities conducted by the organization, some of which may be related to the exempt purpose Not substantially related to the exempt purpose To be related to the accomplishment of the exempt purpose, the conduct of the business activities must be causally related and contribute importantly to the exempt purpose Whether a causal relationship exists and the degree of its importance are determined by examining the facts and circumstances Regularly carried on by the organization Intent is to assure that only activities that are actually competing with taxable organizations are subject to the UBIT Factors to be considered a Frequency of the activity b Continuity of the activity c Manner in which the activity is pursued UBIT Tax Model – = ± = Gross unrelated business income Deductions Net unrelated business income Modifications Unrelated business taxable income pp 15-17 to 15-23, Concept Summary 15.4, and Figure 15.2 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-22 49 2012 Corporations Volume/Solutions Manual a AIDS, Inc., is a charitable organization that is exempt from Federal income taxes under § 501(c)(3) However, it is subject to Federal income tax on its unrelated business income The retail medical supply store is an unrelated trade or business The Federal tax liability is calculated using the corporate tax rates on UBTI, assumed to be the net income of the organization minus the $1,000 standard deduction 15% × $ 50,000 = 25% × $ 25,000 = 34% × $ 25,000 = 39% × $204,000 = $304,000 b $ 7,500 6,250 8,500 79,560 $101,810 The Episcopal Church is a religious organization that is exempt from Federal income tax under § 501(c)(3) However, it is subject to Federal income tax on its unrelated business income The gift shop competes with commercial entities It is staffed by employees rather than volunteers The gift shop is classified as an unrelated trade or business The employee salaries of $80,000 and the $1,000 standard deduction are claimed against net income of $300,000 to produce taxable income of $219,000 The Federal tax liability is $68,660 15% × $ 50,000 = 25% × $ 25,000 = 34% × $ 25,000 = 39% × $119,000 = $219,000 $ 7,500 6,250 8,500 46,410 $68,660 c Education University is an educational organization that is exempt from Federal income tax under § 501(c)(3) However, it is subject to Federal income tax on its unrelated business income The vending machine activity, which could be provided by a nonexempt business, appears to be an unrelated trade or business However, the Code provides that if the trade or business is conducted primarily for the convenience of the organization’s students, faculty, and staff, the activity is not an unrelated trade or business Thus, the $75,000 is exempt from Federal income tax d The thrift shop appears to compete with for-profit businesses However, since all of the inventory is received through contributions, the thrift shop is not classified as an unrelated trade or business Thus, the $100,000 profit generated by the thrift shop is exempt e Since the unrelated business gross income is not at least $1,000, Small is not subject to the unrelated business income tax f The unrelated business income tax does not apply to In Care However, the tax on feeder organizations does apply and the related income tax imposed on the corporation is $217,600 ($640,000 × 34%) pp 15-17 to 15-23, Concept Summary 15.4, and Figure 15.2 50 Since Ongoing has unrelated business gross income greater than $1,000, it is subject to the unrelated business income tax Since the sum of its unrelated business expenses of $8,000 and the statutory deduction of $1,000 is less than the gross unrelated business income of $22,000, its unrelated business income tax is $1,950 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exempt Entities 15-23 Gross unrelated business income Less: Deductions Unrelated business expenses Statutory amount Unrelated business taxable income $22,000 (8,000) (1,000) $13,000 Tax on $13,000 = $1,950 ($13,000 × 15%) Figure 15.2 51 a The admission charge will not affect the exempt status of Falcon No statutory provision associates the charging of an admission fee with loss of exempt status b Neither the snack sales revenue nor the admission revenue are associated with an unrelated trade or business of Falcon Therefore, such revenues are exempt from Federal income tax c Date: April 20, 2011 To: Board of Falcon Basketball League From: Anne Sims, Treasurer Subject: Effect of Charging Admission Fee on Tax-Exempt Status As you are aware, the Falcon Basketball League is exempt from Federal income tax Several board members have raised the question of whether the new policy of charging small admission fees will affect the exempt status My research had led me to conclude that the charging of the admission fees will not affect our exempt status We need not notify the IRS that we are now charging an admission fee pp 15-17 to 15-20 52 a The digital TV repair and sales program is not an unrelated trade or business The digital TV repair is part of the exempt training purpose of Onward The eventual sale of the digital TVs is treated as related to the exempt purpose of Onward From the time the digital TVs exit the training program, there is no change in the state of the digital TVs b Contributions Revenues from digital TVs sales Total revenues Less expenses Administrative Materials and supplies Utilities Wages Rent Total expenses Net income $ 700,000 3,600,000 $ 500,000 800,000 25,000 1,200,000 250,000 $4,300,000 (2,775,000) $1,525,000 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-24 2012 Corporations Volume/Solutions Manual There is no unrelated trade or business, so none of the net income is subject to the UBIT Concept Summary 15.4 and Figure 15.2 53 a The $250,000 contribution made by Animal Feed to Save the Squirrels is a qualified corporate sponsorship payment Such payments are not unrelated business income Thus, Save the Squirrels’ unrelated business income tax is $0 b The $250,000 contribution made by Animal Feed is not a qualified corporate sponsorship payment because Save the Squirrels advertises Animal Feed products in its monthly newsletter Thus, Save the Squirrels has unrelated business income of $250,000 Assuming there are no related expenses or adjustments, the unrelated business taxable income is $249,000, after the $1,000 standard deduction The tax liability is $80,360 [($50,000 × 15%) + ($25,000 × 25%) + ($25,000 × 34%) + ($149,000 × 39%)] p 15-20 54 a The bingo games have no effect on the exempt status of Faith Church However, since commercial bingo games (conducted for a profit motive) are permitted in the city, the net income of $90,000 from the bingo games is subject to the UBIT b Since bingo games can be conducted in the resort city by for-profit entities, Faith is subject to the unrelated business income tax The amount of the UBIT is $18,850 [($50,000 × 15%) + ($25,000 × 25%) + ($15,000 × 34%)] p 15-21 55 a In calculating unrelated business taxable income (UBIT), both the charitable contributions associated with the unrelated trade or business and the other charitable contributions are eligible for deduction However, the charitable contribution deduction is limited to 10% of UBIT (excluding the deduction for charitable contributions) Of the $45,000 of charitable contributions, only $40,000 ($400,000 × 10%) can be deducted in calculating unrelated business taxable income Therefore, UBIT is $360,000 ($400,000 – $40,000) b The change in the composition of charitable contributions does not affect the method for calculating UBIT Therefore, UBIT is $361,000 ($400,000 – $39,000) Both the charitable contributions associated with the unrelated trade or business ($38,000) and the other charitable contributions ($1,000) are eligible for deduction p 15-23 56 a Since the subsidiary is not an exempt organization, it is taxed as a regular corporation The Federal income tax liability is $92,450 [($50,000 × 15%) + ($25,000 × 25%) + ($25,000 × 34%) + ($180,000 × 39%)] b Comfort is not taxed on the earnings of the subsidiary since it is a separate corporation The $200,000 of dividends that Comfort receives is not unrelated business taxable income, even though Comfort controls the subsidiary If the income consisted of other types of passive income (i.e., interest, annuity, royalty, or rent income), meeting the 80% control requirement would result in the income being included in the calculation of unrelated business taxable income (i.e., a positive adjustment) © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exempt Entities 15-25 pp 15-11, 15-19 to 15-23, Concept Summary 15.4, and Figure 15.2 57 Tranquility must include the $130,000 ($300,000 rent income – $170,000 rent expenses) in its unrelated business taxable income The ownership of the building and the related cost recovery deduction of Blouses have no effect on Tranquility pp 15-23 and 15-24 58 a Rent income from property is not included in unrelated business taxable income (i.e., a negative adjustment), unless personal property is leased with the real property and more than 50% of the rent income under the lease is from the personal property Of Kind’s total rent income under the lease of $225,000 ($100,000 from real property and $125,000 from personal property), 56% ($125,000/$225,000) is from the personal property Therefore, both the net rent income from the land and building of $60,000 ($100,000 rent income – $40,000 rent expenses) and net rent income from the factory equipment of $100,000 ($125,000 rent income – $25,000 rent expenses) are included in unrelated business taxable income Net rent income from land and building Net rent income from factory equipment Unrelated business taxable income b $ 60,000 100,000 $160,000 The more than 50% test is based on rent income rather than on net rent income Thus, even though only 48% of the net rent income is from personal property, more than 50% (56%) of the gross rent income is from personal property Land and building Factory equipment Gross Rent Income $100,000 $125,000 % 44% 56% Net Rent Income $80,000 $75,000 % 52% 48% Therefore, both the $80,000 net rent income from the land and building and $75,000 net rent income from the factory equipment are included in unrelated business taxable income pp 15-23 and 15-24 59 Gains or losses from the sale, exchange, or other disposition of property, except for inventory, are not included in unrelated business taxable income Education, Inc., has a net gain of $78,000 from the property transactions Loss on sale of land and building Gain on sale of land and building Loss on sale of investment land Loss on sale of computers Net gain ($ 42,000) 185,000 (45,000) (20,000) $ 78,000 Since none of these transactions relate to inventory, the effect on unrelated business taxable income is $0 p 15-24 and Example 21 60 All of Medical’s charitable contributions (both those associated with the unrelated business and those not) are eligible for deduction in calculating unrelated business taxable income Since the $40,000 of charitable contributions associated with the unrelated business not exceed the statutory ceiling of $45,000 ($450,000 ì 10%), no positive modification required â 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-26 2012 Corporations Volume/Solutions Manual Because only $40,000 has been deducted in calculating net unrelated business income, a negative adjustment of $4,000 is then made for the charitable contributions not associated with the unrelated business, in calculating unrelated business taxable income pp 15-23, 15-24, and Examples 17 and 22 61 Yes, 20% is debt-financed property If the building is property for which substantially all of the use is for the achievement of the exempt purpose of Crow, it is not classified as debt-financed property However, the term “substantially all” requires that the use in the exempt purpose be at least 85% of the use of the property by the exempt organization Since Crow’s use for exempt purposes is only 80%, the “substantially all” requirement is not satisfied Therefore 20% of the building is classified as debt-financed property pp 15-25, 15-26, and Example 25 62 Debt-financed property generally includes all property of the exempt organization that is held to produce income and on which there is acquisition indebtedness The following properties of Benevolent, then, might be debt-financed property Property Building A Building C Building D Adjusted Basis $400,000 600,000 900,000 Property for which substantially all (at least 85%) of the use is for the achievement of the exempt purpose of the organization is excluded from debt-financed property Thus, Building A (100%) and Building C (90%) are not debt-financed property Building D is debt-financed property, to the extent of its use (30%) that does not support Benevolent’s exempt purpose, or $270,000 (30% non-exempt use × $900,000 adjusted basis) pp 15-25 to 15-29 63 a Rodeo is required to file an annual information return on Form 990 (Return of Organization Exempt from Income Tax) The relevant amount for the filing requirement is the total gross receipts ($321,000) rather than the UBI amount ($23,000) Thus, Rodeo cannot file using either Form 990-N or Form 990-EZ b Rodeo is subject to the tax on unrelated business income The $23,000 of unrelated business gross receipts far exceeds the $1,000 exception Thus, Rodeo must file Form 990-T (Exempt Organization Business Income Tax Return) c The return due date for both the Form 990 and the Form 990-T is October 15th (i.e., the 15th day of the 5th month after the end of the taxable year) pp 15-27 to 15-29 64 a Yes, Education is required to file an annual information return b The return should be filed on Form 990-PF (Return of Private Foundation) c The due date for Form 990-PF is the fifteenth day of the fifth month after the end of the tax year For Education, the due date is October 15, 2011 © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exempt Entities d 15-27 Exempt organizations that are not private foundations must file the annual information return on Form 990 (Return of Organization Exempt from Income Tax) A Form 990-EZ can be used if the organization’s gross receipts for the tax year not exceed $200,000 While Education’s net receipts were only $20,000 ($180,000 – $160,000), its gross receipts of $180,000 are used for this purpose The due date for Education’s Form 990-EZ is October 15, 2011 pp 15-28, 15-29, and Example 31 65 a If Historic Burg is a private operating foundation, the value of the charitable contribution is $100,000 If Sally had sold the chest, she would have had a long-term capital gain of $45,000 ($100,000 – $55,000) However, for donees who are not private nonoperating foundations, the deduction is limited to the donor’s basis only if the donated property is tangible personal property and the use by the donee is unrelated to its exempt purpose While the chest is tangible personal property, Historic Burg can be expected to display the chest in its museum Sally’s charitable contribution deduction is $90,000 The $100,000 gift amount exceeds the AGI ceiling on her contribution deduction of $90,000 ($300,000 × 30%) The $10,000 excess amount qualifies for five-year carryover b If Historic Burg is a private nonoperating foundation, the value of Sally’s contribution is $55,000 ($100,000 fair market value – $45,000 negative adjustment) For appreciated long-term capital gain property contributed to donees who are private nonoperating foundations, only basis is deducted Sally’s charitable contribution deduction is $55,000 The AGI limit of $150,000 ($300,000 × 50%) exceeds $55,000 Chapter The answers to the Research Problems are incorporated into the Instructor’s Guide with Lecture Notes to accompany the 2012 Annual Edition of SOUTH-WESTERN FEDERAL TAXATION: CORPORATIONS, PARTNERSHIPS, ESTATES & TRUSTS © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-28 2012 Corporations Volume/Solutions Manual NOTES © 2012 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part ... http://downloadslide.blogspot.com 15-22 49 2012 Corporations Volume/Solutions Manual a AIDS, Inc., is a charitable organization that is exempt from Federal income taxes under § 501(c)(3) However, it is subject to Federal income... part To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 15-28 2012 Corporations Volume/Solutions Manual NOTES © 2012 Cengage Learning All Rights Reserved... Instructor’s Guide with Lecture Notes to accompany the 2012 Annual Edition of SOUTH-WESTERN FEDERAL TAXATION: CORPORATIONS, PARTNERSHIPS, ESTATES & TRUSTS © 2012 Cengage Learning All Rights Reserved May