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Chapter 23 Exempt Entities
Research Problems
Research Problem 1. Wonderful Wilderness, Inc., is a tax-exempt organization. Its mission is to “explore, enjoy, and protect the wild places of the earth; practice and promote the responsible use of the earth’s ecosystems and resources; educate and enlist humanity to protect and restore the quality of the natural and human environment; and use all lawful means to carry out these objectives.”
Lloyd Morgan, the chief financial officer, presents you with the following information.
Wonderful Wilderness raises funds to support its mission in a variety of ways, including contributions and membership fees. As part of this effort, Wonderful
Wilderness develops and maintains mailing lists of its members, donors, catalog purchasers, and other supporters.
Wonderful Wilderness holds exclusive ownership rights to its mailing lists. To acquire the names of additional prospective members and supporters, Wonderful
Wilderness occasionally exchanges membership lists with other organizations. In addition, Wonderful Wilderness permits other tax-exempt organizations and commercial entities to pay a fee, as set forth in a fee schedule, to use its mailing lists on a one-time basis per transaction.
Morgan is aware that the Federal income tax law applies a UBIT. He is also aware of the § 512(b)(2) provision that excludes royalties from the UBIT. An IRS agent has raised the issue that the revenue from the use of the mailing lists by other entities may be taxable as unrelated business income. Morgan wants you to research this issue for him.
Write a letter to Morgan that contains your findings, and prepare a memo for the tax research files. Wonderful Wilderness’s address is 100 Wilderness Way, Pocatello, ID
83209.
Research Problem 2. Your client, Rich N. Ready, has come to you for advice. Rich is interested in many social welfare issues (e.g., access to higher education, welfare reform, and abortion rights). He wishes to use his wealth to educate the general public on these issues, as well as to influence related legislation. Further, he wants to assist the financing of campaigns for political candidates who reflect his views.
Rich’s friend Penny suggested that he organize a § 501(c)(4) organization, telling him that such organizations not only are tax-exempt, but also need not disclose the names of their donors. Thus, Rich could participate in these activities anonymously. However,
Rich saw that the Internal Revenue Code requires that a § 501(c)(4) organization must be operated exclusively for “the promotion of social welfare.” This would seem to preclude the lobbying and political campaigning support that Rich desires.
Is a § 501(c)(4) organization appropriate for Rich’s plans? Summarize your findings in an e-mail to your instructor; be specific in your answer(s).
Research Problem 3. Roger is the pastor at the Third Ecumenical Church in Atlanta.
Over lunch with Priscilla, the pastor at another church with whom Roger went to seminary, Roger learns that another friend’s church recently had its tax-exempt status revoked for engaging in political activities. From time to time, certain political figures “give testimony” at Roger’s church. Being concerned about his own church’s taxexempt status, he asks you to provide him with the types of activities his church should not engage in or permit.
Locate a Revenue Ruling that you can use to provide Roger with the desired information.
Summarize the ruling with two PowerPoint slides.
Research Problem 4. Verify the exempt status of the symphony orchestra that performs closest to your home. Who are its three highest-paid associates? Send an e-mail to your instructor explaining how you found this information.
Research Problem 5. Use www.guidestar.org to obtain the following information on the Jamestown Yorktown Foundation, Inc., which is located in Williamsburg,
Virginia.
• Locate the foundation’s website.
• Under what paragraph of § 501(c) is the organization exempt from Federal income tax?
• Use the Form 990 to determine the amount of compensation paid to officers and directors.
Roger CPA Review Questions
1. Happy House, Inc., an exempt organization, has $340,000 of gross unrelated business income (UBI) in its first year of operations. The following expenses were incurred in producing the UBI.
Expense Amount
Cost of goods sold $100,000
Depreciation 18,000
Repairs and Maintenance 4,000
Miscellaneous 2,000
Happy House qualifies for the standard annual deduction and has documented plans for reinvesting 100% of net proceeds from UBI back into its exempt activities.
The corporate tax rate is 34%. Considering only the above facts, what is Happy
House’s unrelated business income tax (UBIT) liability for the year?
a. $79,220
b. $73,440
c. $0
d. $73,100
2. The International Association of Accountants (IAA), a labor union, made a one-time donation to a political candidate who is also a member of the organization. In addition, the IAA publicly endorsed the member-candidate through flyers mailed to its membership. Which of the following is true about the IAA exempt status?
a. The IAA is entitled to exempt status because IRC 501(c) specifically allows labor unions to be exempt.
b. The IAA is entitled to exempt status because the candidate it supported is a member of the union.
c. The IAA is entitled to exempt status because it only made a one-time donation, which is not considered actual influence.
d. The IAA will be denied exempt status because it supported a specific political candidate.
Internet
Activity
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
3. Which of the following exempt organizations are required to file an annual information return if gross receipts exceed $50,000 in a year?
I. A charity
II. A labor union
III. A church
a. I, II, and III
b. I and II
c. I only
d. II only
4. What is the due date for an exempt organization’s annual information return?
a. The 15th day of the second month after the organization’s year-end.
b. The 15th day of the third month after the organization’s year-end.
c. The 15th day of the fourth month after the organization’s year-end.
d. The 15th day of the fifth month after the organization’s year-end.