Question 1

Certain § 501(c)(3) exempt organizations are permitted to engage in lobbying activities on an elective, limited basis.
Churches are allowed to make this election.

Accepted Answer

Churches are not allowed to make the 501(h) election, which permits certain 501(c)(3) organizations to engage in limited lobbying activities.

Question 2

An educational organization such as Williams College that is exempt under § 501(c)(3) cannot be classified as a private foundation if its only sources of revenue are from tuition and alumni contributions.

Accepted Answer

An educational organization like Williams College can be classified under § 501(c)(3) as a public charity rather than a private foundation, primarily because it receives a significant portion of its income from tuition, alumni contributions, and public support, which meets the public support test criteria, distinguishing it from a private foundation that typically receives funding from a limited number of sources.

Question 3

While the major objective of the Federal income tax law is to raise revenue, social considerations and economic objectives also affect the tax law.

Accepted Answer

The Federal income tax law is designed not only to raise revenue for government operations but also to achieve social and economic objectives, such as encouraging certain behaviors (e.g., home ownership, education savings) and redistributing wealth.

Question 4

Engaging in a prohibited transaction can result in an exempt organization being subject to Federal income tax, but such an act cannot cause the entity to lose its exempt status unless the exempt organization repeats the prohibited transaction.

Accepted Answer

Engaging in a prohibited transaction can indeed result in an exempt organization losing its exempt status, not just being subject to Federal income tax. The severity of the violation and the frequency of such transactions can lead to revocation of the exempt status by the IRS.

Question 5

Some of the excise taxes that may be imposed on private foundations may be imposed on both the private foundation and the foundation manager.

Accepted Answer

Certain excise taxes, such as those related to self-dealing, failure to distribute income, and excess business holdings, can be imposed on both the private foundation itself and on the foundation managers who knowingly participate in the act leading to the tax.

Question 6

The League of Women Voters is a § 501(c)(3) organization.

Accepted Answer

The League of Women Voters is a § 501(c)(4) organization, which allows it to engage in lobbying and political activities, unlike a § 501(c)(3) organization that is limited in such activities.

Question 7

Theater, Inc., an exempt organization, owns a printing company, Printers, Inc., that remits 85% of its profits to Theater. Since Printers remits at least 85% of its profits to Theater, neither Theater, nor Printers, must pay income tax on this $85,000 ($100,000 × 85%).

Accepted Answer

The income from Printers, Inc. would be considered unrelated business income for Theater, Inc., and thus subject to unrelated business income tax (UBIT), despite the profit being remitted to an exempt organization.

Question 8

A feeder organization is an exempt organization that provides funding for nutritional programs for children.

Accepted Answer

A feeder organization typically refers to an entity that supports or supplies recruits, members, or resources to another, larger organization, rather than specifically funding nutritional programs for children.

Question 9

An intermediate sanction imposed by the IRS on an exempt organization is a more stringent sanction than revocation of exempt status.

Accepted Answer

An intermediate sanction is a less severe penalty than revocation of exempt status, allowing the organization to correct its behavior while maintaining its exempt status.

Question 10

All organizations that are exempt from Federal income tax are "charities."

Accepted Answer

Not all organizations exempt from Federal income tax are charities. Many types of organizations can be exempt, including charities, but also including other types such as social welfare organizations, labor unions, trade associations, and more, under different sections of the Internal Revenue Code (e.g., 501(c)(3) for charities, 501(c)(4) for social welfare organizations, etc.).

Question 11

The tax consequences to a donor of making a charitable contribution to a private foundation may be less favorable than the tax consequences to a donor of making a charitable contribution to a public charity.

Accepted Answer

Private foundations often have lower deduction limits for charitable contributions compared to public charities, and donations to private foundations may be subject to more stringent rules, making the tax benefits less favorable for the donor.

Question 12

General requirements for exempt status include the organization serving the common good and the organization being a not-for-profit entity.

Accepted Answer

Organizations seeking exempt status, such as 501(c)(3) status in the United States, must serve the public good in some capacity and operate on a not-for-profit basis, meaning they do not distribute profits to private shareholders or individuals.

Question 13

Certain § 501(c)(3) exempt organizations are permitted to engage in lobbying activities in the same manner as a C
corporation.

Accepted Answer

§ 501(c)(3) organizations are allowed to engage in some lobbying, but there are strict limits on the amount of lobbying activities they can conduct without jeopardizing their tax-exempt status, unlike C corporations which do not have such restrictions.

Question 14

To satisfy the broadly supported provision to avoid classification as a private foundation, an exempt organization must satisfy both an external support test and an internal support test. Under the internal support test, more than one- third of the exempt organization's support for the taxable year must come from gross investment income and unrelated business taxable income.

Accepted Answer

The internal support test actually requires that no more than one-third of the exempt organization's support for the taxable year come from gross investment income and unrelated business taxable income, to avoid classification as a private foundation.

Question 15

The purpose of the excise tax imposed on a private foundation for failure to distribute sufficient levels of income is to motivate the foundation to distribute more of its income for application to exempt purposes.

Accepted Answer

The excise tax on private foundations for failing to distribute sufficient income is designed to encourage these organizations to actively support their charitable, educational, or other exempt purposes by distributing a minimum amount of their income for these purposes.

Question 16

A feeder organization is exempt from Federal income taxation because it carries on a trade or business for the benefit of an exempt organization and remits its profits to the exempt entity.

Accepted Answer

A feeder organization is not automatically exempt from Federal income taxation simply because it carries on a trade or business for the benefit of an exempt organization and remits its profits to the exempt entity. To be exempt, the organization itself must meet specific requirements and obtain tax-exempt status from the IRS.

Question 17

The excise taxes such as the tax on self-dealing and the tax on excess business holdings are imposed on exempt organizations classified as private foundations. The taxes are not imposed on exempt organizations classified as public charities.

Accepted Answer

Private foundations, due to their funding structure and potential for self-dealing, are subject to specific excise taxes such as the tax on self-dealing and the tax on excess business holdings. Public charities, which receive broader public support, are generally not subject to these taxes.

Question 18

An exempt entity is not subject to any Federal income tax.

Accepted Answer

An exempt entity, while generally exempt from federal income tax, may still be subject to tax on unrelated business income.

Question 19

A church is one of the types of exempt organizations.

Accepted Answer

Churches are typically recognized as tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code, which includes religious, charitable, scientific, and educational organizations.

Question 20

To satisfy the "not-for-profit" requirement for exempt status, the entity may not be engaged in a trade or business.

Accepted Answer

A not-for-profit entity can engage in trade or business activities as long as those activities are related to its exempt purposes and the profits are not distributed to private shareholders or individuals.

Quiz 23: Exempt Entities

Certain § 501(c)(3) exempt organizations are permitted to engage in lobbying activities on an elective, limited basis. Churches are allowed to make this election.