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Chapter 23 Exempt Entities
Discussion Questions
1. LO.3 An exempt organization appropriately makes the § 501(h) election to lobby on a limited basis. The amount of its lobbying expenditures is less than its lobbying expenditures ceiling, yet it is subject to a tax at a 25% rate. Explain.
2. LO.5 Although private foundations generally are exempt from Federal income tax, they may be subject to two types of certain excise taxes. Identify these taxes, and discuss why they are imposed on private foundations.
3. LO.5 Sunset, Inc., a § 501(c)(3) exempt organization that is classified as a private foundation, generates investment income of $500,000 for the current tax year.
This amount represents 18% of Sunset’s total income.
a. What type of tax is imposed on Sunset associated with its investment income?
b. Is the receipt of this investment income likely to result in Sunset losing its exempt status? Why or why not?
c. Would your answers in parts (a) and (b) change if the $500,000 represented greater than 50% of Sunset’s total income? Explain.
4. LO.4, 5 Really Welcome, Inc., a tax-exempt organization, receives 30% of its support from disqualified persons. Another disqualified person has agreed to match this support if Really Welcome will appoint him to the organization’s board of directors. What tax issues are relevant to Really Welcome as it makes this decision?
5. LO.6 Winston recently became the treasurer of Homeless, Inc., a § 501(c)(3) organization that feeds the homeless. One of the entity’s directors has proposed that
Homeless purchase and operate a fast-food franchise as part of Homeless, Inc., to raise additional revenue (a projected increase of 45%) to carry out its charitable mission.
Because the earnings generated by the fast-food franchise would be tax-exempt, substantial additional revenue would be provided. How should Winston respond?
6. LO.6 An exempt municipal hospital operates a pharmacy that is staffed by a pharmacist
24 hours per day. The pharmacy serves only hospital patients. Is the pharmacy likely an unrelated trade or business? Explain.
7. LO.6 An exempt organization is considering conducting bingo games on Thursday nights as a way of generating additional revenue to support its exempt purpose.
Before doing so, however, the president of the organization has come to you for advice regarding the effect on the organization’s exempt status and whether the net income from the bingo games will be taxable. Identify the relevant tax issues.
8. LO.6 Define the following with respect to unrelated debt-financed property.
a. Debt-financed income.
b. Debt-financed property.
c. Acquisition indebtedness.
9. LO.1, 7 Tom is the treasurer of the City Garden Club, a new entity in the community.
A friend who is the treasurer of the garden club in a neighboring community tells Tom that it is not necessary for City Garden Club to file a request for exempt status with the IRS. Has Tom received correct advice? Explain.
10. LO.1, 7 Abby Sue recently became the treasurer of First Point Church. The church has existed for three years and never has filed anything with the IRS.
a. Identify any reporting responsibilities that Abby Sue might have as church treasurer.
b. Would your answer in part (a) change if First Point Church had existed for more than 10 years? Explain.
c. Would your answer in part (a) change if First Point Church had reported some unrelated business income? Explain.
11. LO.7 Shane and Brittany each are a treasurer for a § 501(c)(3) exempt organization.
Neither exempt organization is a church. Each year, Shane’s exempt organization files a Form 990 while Brittany’s exempt organization files a Form 990–PF.
Discuss the public disclosure requirements for each exempt organization.