Chapter 23 Exempt Entities

Click here go to purchase the Solutions Manual

---

Problems
15. LO.2, 3 Wellness, Inc., a § 501(c)(3) organization, makes lobbying expenditures of $340,000 this year. Exempt purpose expenditures were $600,000 for the first six months of the year and $950,000 for the last six months of the year. Determine the Federal income tax consequences to Wellness if:
a. It does not make the § 501(h) lobbying election.
b. It does make the § 501(h) lobbying election.
16. LO.3, 6, 8 Roadrunner, Inc., is an exempt medical organization. Quail, Inc., a sporting goods retailer, is a wholly owned subsidiary of Roadrunner.
Roadrunner inherited the Quail stock last year from a major benefactor of the medical organization. Quail’s taxable income is $550,000. Quail will remit all of its earnings, net of any taxes, to Roadrunner to support the exempt purpose of the parent.
a. Is Quail subject to Federal income tax? If so, calculate the liability.
b. Arthur Morgan, the treasurer of Roadrunner, has contacted you regarding minimizing or eliminating Quail’s tax liability. He would like to know if the tax consequences would be better if Quail were liquidated into Roadrunner. Write a letter to
Morgan that contains your advice. Roadrunner’s address is 500 Rouse Tower,
Rochester, NY 14627.
17. LO.3 Initiate, Inc., a § 501(c)(3) organization, receives the following revenues and incurs the following expenses.
Grant from Gates Foundation $ 70,000
Charitable contributions received 625,000
Expenses in carrying out its exempt mission 500,000
Net income before taxes of Landscaping, Inc., a wholly owned for-profit subsidiary 400,000
Landscaping, Inc., remits all of its after-tax profits each year to Initiate. Calculate the amount of the Federal income tax, if any, for Initiate and for Landscaping.
18. LO.4 Pigeon, Inc., a § 501(c)(3) organization, received support from the following sources.
Governmental unit A for services rendered $ 6,300
Governmental unit B for services rendered 4,500
Fees from the general public for services rendered (Each payment was of $100) 75,000
Gross investment income 39,000
Contributions from disqualified persons 26,000
Contributions from other than disqualified persons (Each gift was of $50) 160,000
Total support $310,800
a. Does Pigeon satisfy the test for receiving broad public support? Why or why not?
b. Is Pigeon a private foundation? Be specific in your answer.
c. Arnold Horn, Pigeon’s treasurer, has asked you to advise him on whether
Pigeon is a private foundation. Write a letter to him in which you address the issue. His address is 250 Bristol Road, Charlottesville, VA 22903.
19. LO.5 Gray, Inc., a private foundation, reports the following items of income and deductions. Gray is not eligible for the 1% tax rate.
Interest income $ 29,000
Rent income 61,000
Dividend income 15,000
Royalty income 22,000
Unrelated business income 80,000
Rent expenses (26,000)
Unrelated business expenses (12,000)
a. Calculate Gray’s net investment income.
b. Calculate Gray’s tax on net investment income.
20. LO.5, 8 Otis is the CEO of Rectify, Inc., a private foundation. Otis invests $500,000 (80%) of the foundation’s investment portfolio in high-risk derivatives. Previously, the $500,000 had been invested in corporate bonds with an AA rating that earned 4% per annum. If the derivatives investment works as Otis’s investment adviser claims, the annual earnings could be as high as 20%.
a. Determine whether Rectify is subject to any of the taxes imposed on private foundations.
b. If so, calculate the amount of the initial tax.
c. If so, calculate the amount of the additional tax if the act causing the imposition of the tax is not addressed within the correction period.
d. Are Otis and the foundation better off financially if the prohibited transaction, if any, is addressed within the correction period? Explain.
21. LO.5 The board of directors of White Pearl, Inc., a private foundation, consists of
Charlyne, Beth, and Carlos. They vote unanimously to provide a $500,000 grant to Carlos. The grant is to be used for travel and education and does not qualify as a permitted grant to individuals (i.e., it is an act of self-dealing).
a. Calculate the initial tax imposed on White Pearl.
b. Calculate the initial tax imposed on the foundation manager (i.e., board of directors).
22. LO.6 The Open Museum is an exempt organization that operates a gift shop. The museum’s annual operations budget is $3.2 million. Gift shop sales generate a profit of $900,000. Another $600,000 of investment income is generated by the museum’s endowment fund.
Both the income from the gift shop and the endowment income are used to support the exempt purpose of the museum. The balance of $1.7 million required for annual operations is provided through admission fees.
Wayne Davis, a new board member, does not understand why the museum is subject to tax at all, particularly because all of the entity’s profits are used in carrying out the mission of the museum. The museum’s address is 250 Oak Avenue, Peoria, IL 61625.
a. Calculate the amount of unrelated business income.
b. Assume instead that the endowment income is reinvested in the endowment fund, rather than being used to support annual operations. Calculate the amount of unrelated business income.
c. As the museum treasurer, write a letter to Wayne explaining the reason for the tax consequences. Mr. Davis’s address is 45 Pine Avenue, Peoria, IL 61625.
23. LO.6 Upward and Onward, Inc., a § 501(c)(3) organization that provides training programs for welfare recipients, reports the following income and expenses from the sale of products associated with the training program. Calculate Upward and Onward’s UBIT.
Gross income from sales $425,000
Cost of goods sold 106,000
Advertising and selling expenses 26,000
Administrative expenses 112,500
a. Assume that the sale of the training program products is substantially related to
Upward and Onward’s exempt purpose.
b. Assume that the sale of the training program products is not substantially related to Upward and Onward’s exempt purpose.
24. LO.6 Perch, Inc., an exempt organization, records unrelated business taxable income of $4 million.
a. Calculate Perch’s UBIT.
b. Prepare an outline of a presentation you are going to give to the new members of Perch’s board on why Perch is subject to the UBIT even though it is an exempt organization.
25. LO.6 For each of the following organizations, determine its UBTI and any related UBIT.
a. AIDS, Inc., an exempt charitable organization that provides support for individuals with AIDS, operates a retail medical supply store open to the general public.
The net income of the store, before any Federal income taxes, is $305,000.
b. The local Episcopal Church operates a retail gift shop. The inventory consists of the typical items sold by commercial gift shops in the city. The director of the gift shop estimates that 80% of the gift shop sales are to tourists and 20% are to church members. The net income of the gift shop, before the salaries of the three gift shop employees and any Federal income taxes, is $300,000. The salaries of the employees total $80,000.
c. Education, Inc., a private university, has placed vending machines in the student dormitories and academic buildings on campus. In recognition of recent tuition increases, the university has adopted a policy of merely trying to recover its costs associated with the vending machine activity. For the current year, however, the net income of the activity, before any Federal income taxes, is $75,000.
26. LO.6 For each of the following organizations, determine its UBTI and any related UBIT.
a. Worn, Inc., an exempt organization, provides food for the homeless. It operates a thrift store that sells used clothing to the general public. The thrift shop is staffed solely by four salaried employees. All of the clothes it sells are received as contributions. The $100,000 profit generated for the year by the thrift shop is used in Worn’s mission of providing food to the homeless.
b. Small, Inc., an exempt organization, recorded gross unrelated business income of $900 and unrelated business expenses of $400.
c. In Care, Inc., is a § 501(c)(3) exempt organization. It owns a convenience store and gas pumps, which it received as a bequest from a patron. The store/gas pumps entity is organized as StopBy, a C corporation. Because StopBy is profitable,
In Care hires a manager and several employees to run the entity. For the current year, StopBy’s profit is $640,000. All of this amount is distributed by
StopBy to In Care to use in carrying out its exempt mission.
27. LO.6 Save the Squirrels, Inc., a § 501(c)(3) organization that feeds the squirrels in municipal parks, receives a $250,000 contribution from Animal Feed, Inc., a corporation that sells animal feed. In exchange for the contribution, Save the Squirrels will identify
Animal Feed as a major supporter in its monthly newsletter. Determine Save the
Squirrels’s UBTI and any related UBIT under the following independent assumptions.
a. Save the Squirrels receives no other similar payments.
b. Save the Squirrels agrees to identify Animal Feed as a major supporter and to include a half-page advertisement for Animal Feed products in its monthly newsletter as a result of the contribution.
28. LO.6 Fish, Inc., an exempt organization, reports unrelated business income of $500,000 (before any charitable contribution deduction). During the year,
Fish makes charitable contributions of $54,000, of which $38,000 are associated with the unrelated trade or business.
a. Calculate Fish’s unrelated business taxable income (UBTI).
b. Assume that the charitable contributions are $41,000, of which $38,000 are associated with the unrelated trade or business. Calculate the UBTI.
29. LO.6 Save, Inc., an exempt organization, sells the following assets during the tax year. Determine the effect of these transactions on Save’s unrelated business taxable income.
Asset Gain (Loss) Use
Land and building $100,000 In exempt purpose
Land 25,000 In exempt purpose
Equipment (12,000) Leased to a taxable entity
Automobile (9,000) Leased to a taxable entity
30. LO.7 Seagull, Inc., a § 501(c)(3) exempt organization, uses a tax year that ends on
October 31. Seagull’s gross receipts are $600,000, and related expenses are $580,000.
a. Is Seagull required to file an annual Form 990?
b. If so, what is the due date?
31. LO.7 Education, Inc., a § 501(c)(3) organization, is a private foundation with a tax year that ends on May 31. Gross receipts for the fiscal year are $180,000, and the related expenses are $160,000.
a. Is Education required to file an annual information return?
b. If so, what form is used?
c. If so, what is the due date?
d. How would your answers in parts (a), (b), and (c) change if Education was an exempt organization that was not a private foundation?