Taxation Paper 5

(d) The requirement is to determine the correct statement regarding qualification as an exempt organization. To qualify as an exempt organization, the applicant must not be a private foundation organized and operated exclusively to influence legislation pertaining to protection of the environment. Exempt status is specifically denied to organizations if a substantial part of their activities consists of ’carrying on propaganda, or otherwise attempting, to influence legislation, if expenditures exceed certain amounts. Answer (a) is incorrect because an exempt organization cannot be organized for the primary purpose of carrying on a business for profit. Answer (b) is incorrect because an organization must be one of those classes upon which exemption is specifically conferred by the Internal Revenue Code. Answer (c) is incorrect because a social club organized for recreation will qualify for exemption if substantially all of the activities of the club are for such purposes and none of the profits inure to the benefit of any shareholder.

(a) The requirement is to determine the proper tax treatment of Carita Fund’s insurance activities. An otherwise qualifying exempt organization will instead be subject to tax if a substantial part of its activities consists of providing commercial type insurance. Sec. 501(m)(3) provides that ’commercial-type insurance’ does not include insurance provided at substantially below cost to a class of charitable recipients. Since Carita Fund was organized and operated exclusively for charitable purposes, and provided below cost insurance coverage to exempt organizations involved in the prevention of cruelty to children, its insurance activities are exempt from tax. The insurance activities do not constitute unrelated business income because the insurance activities were substantially related to the performance of the fund’s exempt purpose. Answer (c) is incorrect because Carita Fund qualifies as an exempt organization.

(a) The filing of a return covering unrelated business income (Form 990-T) is required of all exempt organizations having at least $1,000 of unrelated business taxable income for the year. However, this does not relieve the organization of having to file a separate information return (Form 990) if it is otherwise required to file. Answer (c) is incorrect because in determining whether income is unrelated business income, the exempt organization’s need for the income or the use it makes of the profits is irrelevant. Answer (d) is incorrect because the tax on unrelated business income of exempt organizations must be paid in full with the return.

(d) A condominium management association wishing to be treated as a homeowners association and thereby qualify as an exempt organization for a particular year must file a separate election for each taxable year no later than the due date of the tax return for which the election is to apply.

(d) An organization wishing to qualify as an exempt organization must be of a type specifically identified as one of the classes on which exemption is conferred by the Code. In no event will exempt status be conferred upon an organization unless the organization is one of those listed. Furthermore, in order to receive exempt status, the organization must file an application with the Internal Revenue Service. Answer (a) is incorrect since an exempt organization may be organized as a corporation. Answer (b) is incorrect because an exempt organization may lose its exempt status by engaging in any prohibited transaction. Answer (c) is incorrect because non-US citizens may be on an exempt organization’s governing board.

(b) The requirement is to determine the correct statement regarding exempt organizations. With the exception chiefly of churches, an exempt organization (other than a private foundation) must nevertheless file an annual information return specifically stating items of gross income, receipts, and disbarments unless its gross receipts are normally not more than $25,000. An exempt organization required to file a return must annually report the total amount of contributions received as well as the identity of substantial contributors. Answer (a) is incorrect because an organization can only achieve exempt status by filing an application for exemption with the Internal Revenue Service. Answer (c) is incorrect because there is no limitation on the amount of compensation that can be paid to an employee if the compensation is reasonable. Answer (d) is incorrect because exempt status can be retroactively revoked if an organization’s character, purposes, or methods of operation are other than as stated in the application for exemption.

(a) The requirement is to determine the correct statement regarding qualification as an exempt organization. To qualify as an exempt organization, the applicant for exemption must fall into one of the specified classes of organizations that are listed in Sec. 501 as being exempt from tax. Answer (d) is incorrect because a social club can be an exempt organization as long as substantially all its activities are for such purposes and no part of its net earnings inures to the benefit of any private shareholder. Answer (c) is incorrect because most exempt organizations are permitted specified levels of lobbying expenditures, and can even elect to be subject to a tax equal to 25% of their excess lobbying expenditures to prevent loss of exempt status. Answer (b) is incorrect because foreign corporations can qualify as exempt organizations.

(c) Organizations that can qualify as exempt organizations are listed in Sec. 501 of the Internal Revenue Code. An exempt organization can take the form of a trust or a corporation. In order to receive exempt status, the organization must file an application with the Internal Revenue Service. In no event will exempt status be conferred upon an organization unless the organization is one of those listed in the Code. Answer (b) is incorrect because there is no limitation on the amount of salary that can be paid an employee.

(b) The requirement is to determine which of the activities is(are) consistent with Hope’s tax-exempt status as a religious organization. An exempt organization must be operated exclusively for its exempt purpose, and other activities not in furtherance of its exempt purpose must be only an insubstantial part of its activities. A religious organization’s providing traditional burial services that maintain the religious beliefs of its members would be consistent with its tax-exempt status as a religious organization. However, conducting recreational functions such as weekend retreats conducted for business organizations ordinarily would not be consistent with the tax-exempt status of a religious organization unless there were tightly scheduled religious activities and only limited free time for incidental recreation activities.

(a) The requirement is to determine which statements are correct in regard to the organizational test to qualify a public service charitable entity as tax-exempt. The term “articles of organization” includes the trust instrument, corporate charter, articles of association, or any other written instruments by which an organization is created. To satisfy the organizational test, the articles of organization (1) must limit the organization’s purposes to one or more exempt purposes described in Sec. 501(c)(3); and, (2) must not expressly empower the organization to engage in activities that are not in furtherance of one or more exempt purposes, except as an insubstantial part of its activities.