Seminar: Taxation Current Issues
Chapter 23
Answer to Question No 1:
Under a substantial part test, an entity engaged in substantial lobbying for any one year could have its tax-exempt status revoked. However, under the alternative spending test, the penalty for breaching the 501(h) limits on lobbying in a given year is much less severe – simply a tax of 25% of the excess expenditure. An electing entity may have its exemption removed only after it has met its lobbying cap by 150 per cent for a period of 4 years. Thus, in that case, even if the expenditure on lobbying falls below the 150 per cent ceiling of the expenditure on lobbying, it must pay a tax on the excess of the expenditure on lobbying at the rate of 150 per cent, it has to pay a tax on excess lobbying expenditure at the rate of 25%.
Answer to question number 2:
Tax based on investment income, tax on self-dealing, tax on failure to distribute income and tax on excess business holdings.
Answer to question number 3:
As regards to the investment income, federal income tax will be imposed on Sunset Associates.
The status of the organization may cause revocation of the exemption status. Organization, in general, enjoy tax exemption because of their involvement in public service in some ways. However, in case of absence of the evidence relating to any public service, an organization may lose its exemption status. Considering that the Sunset Associates is involved in public benefits in some way, it should not lose its exempt-status.
Affirmative. The answer would definitely be changed provided the income goes beyond the limit because an organization gets its exemption for small amount of income not being involved in extensive commercial activities. If the income goes beyond the limit, the organization must have focused on commercial activities, which takes the exemption status away.
Answer to question number 4:
It is likely to lose its tax exemption status if it appoints another disqualified person as one of its board of directors.
Answer to question number 6:
The pharmacy is not likely to be an unrelated trade or business as it serves the public i.e. the patient of the municipal hospital.
Answer to question number 9:
No, Tom has not received the correct advice. It is essential for all organizations that are eligible for tax exemption to apply to IRS to notify. Without proper application, no tax-exemption will apply.
Answer to question number 10:
Abby Sue must report to the IRS accompanied with the tax-exemption request for the church, since the church has passed 27 months already since its formation.
No, as in both cases, the time elapsed is more than 27 months.
No. all unrelated businesses of a tax-exempt organization cannot enjoy similar tax-exemption and therefore, the church can report its unrelated business income subjected to taxation.
Answer to question number 12:
Non-taxable lobbying expenditure = $500,000 × 20% + $700,000 × 15%
= $100,000 + $105,000
= $205,000
Lobbying expense = $205,000 × 150%
= $307,500
Tax liability = ($250,000 – $205,000) × 25%
= $45,000 × 25%
= $11,250
Answer to question number 15:
$258,000
$226,000
Answer to question number 16:
Yes. Quail, despite being a remit earning organization may enjoy tax exempt but it is under federal income tax obligation because it is a subsidiary organization. Its tax liability will be $550,000 × 34% = $187,000.
May 18, 2017
Arthur Morgan, Treasurer
Roadrunner, Inc.
500 Rouse Tower
Rochester, NY 14627
Dear Mr. Morgan,
I am writing you in reference to our discussion over the minimization or elimination of Quail’s tax liability. Quail is still liable to pay income tax unless it liquidates its property to its parent organization Roadrunner. For the time being, it has to pay $187,000 income tax for its earnings of $550,000.
In case, Quail liquidates into Roadrunner, it would have a legal closure, which will exempt it from being a separate tax-paying entity. However, this will not save it from the tax because the sporting good supply business will still be classified as unrelated trade to the Roadrunner, who owns all assets of Quail’s. The amount of tax will remain the same.
As is the case, Quail should not liquidate its property as it will not bring any tax relaxation. Being a separate entity will help it in many cases.
You can contact us if you have further queries.
Sincerely,
Jelyne Rollon
Accountant
Answer to question number 17:
Particulars
Grant from Gates Foundation
$70,000
Charitable contributions received
$625,000
$695,000
Less: Expenses in carrying out its exempt mission
$500,000
Add: Net Income before taxes of Landscaping, Inc., a whollyowned for-profit subsidiary
$400,000
Net Income
$595,000
Deduction 3.8%
$22,610
Net Taxable Income
$572,390
Federal Tax @39.6%
$226666.44
Net Income After Tax
$345,723.56
Answer to question number 18:
Only by performing both internal and external support test, we can ensure that Pigeon is a broad public support. It is obvious that the total support received is $310,800. For the external support test, following:
Test of External Support
Service rendered for government unit A (Min)$5,000
Service rendered for government unit B $4,500
Service rendered for general public $75,000
Non-disqualified persons’ contributions $160,000
Support for Qualification $244,500
Obviously, the external support test is satisfied (244500/31800) = 78.67%
Test of Internal Support
Only gross investment income is tested for the internal support, which gives a (100-78.67) % = 12.55% and satisfy the test. Thus, pigeon satisfy the test for broad public support.
Pigeon is not a private foundation as it has satisfied both internal and external support test of its being a public support organization.
May 21, 2017
Arnold Horn, Treasurer
250 Bristol Road
Charlottesville, VA 22903
Dear Mr. Horn,
I would like to draw your attention to our previous discussion on whether Pigeon is a private foundation or not. From the calculation, Pigeon is a public foundation for it has qualified in the external and internal support test. The external support test gives about 78% whereas the internal support test gives a 12% result. Therefore, the Pigeon cannot be private foundation.
Please feel free to contact for further information.
Sincerely.
Answer to question number 23:
Gross income from sales is $425,000.
The sale of the training program produces $112,250.
Answer to question number 24:
Unrelated business taxable income of Perch’s is $4 million.
Even though an organization is recognized as tax-exempt, it still may be liable for tax on its unrelated business income. For most organizations, unrelated business income is income from a trade or other purpose, that is the basis of the organization’s exemption. An exempt organization that has $100 more of gross income from an unrelated business must file from 900.T. An organization must pay estimated has if it expects its tax for the year to be $500 max.
For this reason Perch’s is liable to pay on an income of $4 million even it is an exempt organization.
Answer to question number 27:
Unrelated business taxable income of Perch’s is $4 million.
Even though an organization is recognized as tax-exempt, it still may be liable for tax on its unrelated business income. For most organizations, unrelated business income is income from a trade or other purpose, that is the basis of the organization’s exemption. An exempt organization that has $100 more of gross income from an unrelated business must file from 900.T. An organization must pay estimated has if it expects its tax for the year to be $500 max.
For this reason Perch’s is liable to pay on an income of $4 million even it is an exempt organization.
Answer to question number 29:
Gains and losses from the sale, exchange, or disposition of property other than the followings are excluded from unrelated business taxable income:
- Stock in trade or other property of a kind that would properly be includable in inventory if on hand at the close of the tax year,
- Property held primarily for sale to customers in the ordinary course of a trade or business, or
- Cutting of timber that an organization has elected to consider as a sale or exchange of the timber.
As per the above provision, the effects on transactions are as follows:
- Land & building: - $100,000 - Excluded from the unrelated business taxable income.
- Land: - $25,000 - Excluded from the unrelated business taxable income.
- Equipment: - ($12,000) - If we assume that leasing is the ordinary course of business of Save. Inc., then it is not excluded from the unrelated business taxable income.
- Automobile: - ($9,000) - If we assume that leasing is the ordinary course of business of Save. Inc., then it is not excluded from the unrelated business taxable income.
Answer to question number 30:
Seagull needs to file an annual return on the 990 form (Return of Organization Exempt from Income Tax). The gross receipts of Seagull are extremely large for filing a 990-N or 990-EZ form.
The fifteenth day of the 5th month is the due date for Form 990 soon after the tax year end. Obviously, the ended date for the Seagull is October 31,2016 is March 15,2017.
