Question 1

Soft, Inc., a § 501(c)(3) organization, has been leasing a building to Ice, Inc., a taxable entity, for 12 years.The lease terminates in the current tax year.Soft's adjusted basis for the building is $350,000.It sells the building to the Realty Partnership, a taxable entity, for $625,000.Selling expenses are $37,500.

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Question 2

Are organizations that qualify for exempt organization status completely exempt from Federal income taxation?

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Question 3

Spirit, Inc., a § 501(c)(3) organization, is classified as a private foundation.It has investment income of $150,000.Calculate Spirit's tax on its investment income.

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Question 4

Radio, Inc., an exempt organization, trains disabled individuals to be radio announcers.Rather than hold a traditional graduation exercise, the graduates compete in a radio announcer contest.Such activities are held four times each year.An admission fee of $10 is charged to the general public to attend the contest.Eight hundred people attended the contest this year, and prizes of $2,000 were given to the top 3 graduates.Calculate the amount of Radio's unrelated business income from this activity.

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Question 5

First Americans, Inc., a § 501(c)(3) organization, operates a museum which depicts the lives of a tribe of Native Americans. It charges an admission fee, but also finances its operations through endowment income, contributions, and gift shop sales. The gift shop is operated by 50 volunteers and the museum is operated by 15 employees. Revenue by source is:

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Question 6

The Dispensary is a pharmacy that is part of a § 501(c)(3) hospital.Its primary mission is to dispense medicines for hospital patients.In addition, the pharmacy dispenses medicines to former hospital patients for a period of up to 30 days after discharge from the hospital.It does this for the dual purpose of convenience to the former patients (i.e., the closest pharmacy is 6 miles away), and to ensure that the former patients receive the medicines that have been prescribed for them.
The Dispensary carefully carries out the policy of the hospital board that no more than 20% of its gross revenues come from former-patient medicine sales.If necessary, in December of each year, sales to former patients are curtailed to assure compliance with this policy.Sales revenue from each of the two sources is as follows for 2011.
  Calculate the amount of The Dispensary's unrelated business gross income.

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Question 7

City, Inc., an exempt organization, has included among other amounts the following in calculating net unrelated business income of $500,000.
  The only expenses incurred associated with these items are rental expenses (which includes depreciation of $10,000) of $15,000.Calculate City, Inc.'s UBTI.

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Question 8

Wett, Inc., a § 501(c)(3) exempt organization, acquired all the stock of a for-profit corporation for $150,000.Wett is a private foundation.The acquired corporation was not a related business.Calculate the tax on excess business holdings.Assume that corrective action is taken so that the additional tax does not apply.

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Question 9

Wonder, Inc., a private foundation, makes a speculative investment of $800,000 that puts the foundation assets at risk.Calculate the tax on jeopardizing investments.Assume that corrective action is taken so that the additional tax does not apply.

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Question 10

Assist, Inc., a § 501(c)(3) organization, receives the following sources of support during the tax year.
  Is Assist, Inc., classified as a private foundation?

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Question 11

Midnight Basketball, Inc., an exempt organization that organizes and conducts basketball games for youths ages 10-13, receives a $50,000 contribution from Brown Shoe Company.Midnight agrees to put Brown's logo on the cover of its monthly newsletter.

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Question 12

Arbor, Inc., an exempt organization, leases land, building, and machinery to a tenant for a 5-year period.The rent income for the land and building is $600,000 per year and that from the related machinery is $90,000 per year.Expenses incurred by Arbor for the land and building during the year are $65,000 and those for the machinery are $38,000.Net unrelated business income, which includes the above rental income and expenses, is $850,000.Calculate Arbor's unrelated business taxable income.

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Question 13

Warmth, Inc., a private foundation, makes an expenditure of $800,000 that should not be made by a private foundation.Calculate the tax on taxable expenditures.Assume that corrective action is taken so that the additional tax does not apply.

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Question 14

Why are some organizations exempt from Federal income tax?

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Question 15

Amber, Inc., an exempt organization, reports unrelated business taxable income of $300,000. Total charitable contributions are $35,000, of which $31,000 (associated with the unrelated trade or business) has been deducted in calculating net unrelated business income. Calculate Amber's positive and negative adjustments in calculating unrelated business taxable income.

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Question 16

Lemon, Inc., a private foundation, engages in a transaction with a disqualified person in the amount of $300,000.Calculate the tax on self-dealing.Assume that corrective action is taken so that the additional tax does not apply.

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Question 17

Hope, Inc., an exempt organization, owns a factory building that it leases to a taxable corporation for $160,000 per year.Related expenses for Hope are $40,000.Hope's average acquisition indebtedness on the building is $600,000 and the average adjusted basis is $800,000.Calculate Hope's unrelated debt-financed income and expenses.Then indicate the effect of these items on unrelated business taxable income.

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Question 18

Watch, Inc., a § 501(c)(3) exempt organization, solicits contributions through a mail campaign.An executive, who recently completed an executive MBA degree program, recommends that personal address labels be included as an additional way to motivate the potential donor to contribute.The value of these labels is $9.00 per potential donor.What is the effect of the inclusion of the address labels on Watch's unrelated business income?

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Question 19

An exempt organization owns a building for which its adjusted basis is $100,000 at the beginning of the year and $90,000 at the end of the year.One-half of the ground floor is leased to a commercial venture for $10,000 per year.The remainder of the first floor and all of the second floor are used by the exempt organization in carrying out its mission.When the exempt organization constructed the building 20 years ago, it incurred a mortgage of $150,000.The final payment of this mortgage was made in December of the current year.The average acquisition indebtedness for the current year is $30,000.Determine to what extent the building is debt-financed property, the amount of debt-financed income, and the portion of debt-financed income that is treated as unrelated business income.

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Question 20

Woeful, Inc., a tax-exempt organization, leases a building and machinery to Purple Partnership.The rental income from the building is $180,000, with related expenses of $70,000.The rental income from the machinery is $12,000, with related expenses of $3,000.What adjustment must be made to net unrelated business income?

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Quiz 23: Exempt Entities